1. download, install, utilize the MS-XP recovery diskettes...
How to obtain Windows XP Setup disks for a floppy boot installation
2. check your CD drive to see if it is set up to do what you want it to do. You already have had some good thoughts...check to see, especially if the CD drive is set up to burn disks...right click on drive, go down to properties, then up to the recording tab...be sure the appropriate stuff is filled in properly.
3. repeat #2 with the USB stick and port
4.You may also want to search the net for a bare bones version of XP [there are lots of them] which can be put on the USB stick and then have the system boot from there...OR...copy the XP install CD to the USB stick and go from there...