What error did WinToFlash give you? If that can be solved, it'll be the simplest method.
The external optical drive was a good idea, but If the bios doesn't support it, there's really no working around that. Double-check the bios settings, though, to see that you do have the optical drive listed first in the boot priority list.
If you decided to go with Ubuntu, it would be much faster installed than running from the flash drive, since it's presumably depending on a USB 1.0 connection, which doesn't have the throughput for the OS to function properly. On an older machine, though, you'd be better off with something lighter (like the "Lubuntu" derivative.)
And of course, the very last option is to take the hard drive out, install XP on it, and put it back in....
~ I know I shouldn't use tildes for decoration, but they always make me feel at home. ~