I'm using an old Dell Inspiron 510m laptop with a broken (and therefore replaced by battery) optical drive. I could still access discs by using an optical driver shared from my network. But reinstalling Windows XP wasn't that easy! This is how I eventually got it working.
I tried this one (dutch version) before but got errors of a broken file. Probably something I did wrong myself. The guide that worked for me is found at http://www.911cd.net/forums//index.php?showtopic=22857.
1) copy all the contents of the source installation disc to a (non space) folder on your desktop. I'll reference it as C:\XPSOURCE from now.
2) plugin your USB drive. I used an old SanDisk Cruzer of 1GB. All contents will be lost so make a backup if needed.
3) download USB_MultiBoot_10.zip and unzip to run the USB_MultiBoot.cmd file in that directory. You can run it from the command line (Start > Run and enter to location of this file).
4) type "1" (without quotes) and hit enter, this will popup a utility to format your USB drive. Leave all options like they are and hit format.
5) back to the console you now type "1" followed by enter and give the path to the XP setup source files, for instance C:\XPSOURCE.
6) next type "2" and hit enter and provide the drivelleter of your USB-drive.
7) type "3" and hit enter and the bootable USB-drive will be created with the given sources.
When booting up your device from this disk you'll have to point it back to this drive each time you reboot until you've finished the installation of Windows. That is when you've successfully logged in. Only then you can start booting from the harddisk and remove the USB-drive.