Install Windows XP on computer that has “System Reserved” partition?

[cannie]

...my laptop doesn't have optical drive to burn a recovery disc...

Even when Windows 7 only offers to you the possibility of burning a recovery disk after building a disk image into an external HDD, in this case using an external USB optical drive, you may afterwards copy the whole contents of your recovery disk into a previously Fat32 formatted pendrive and use it in the future as boot flash device instead of the optical drive.

PS: You may clone the existing OS into a logical unit of your HDD keeping all recovery options as explained at paragraph "2.4.1. - Clone the preinstalled Windows 7" of this tutorial:

http://www.msfn.org/board/topic/144084-duplicate-windows-7-into-the-hdd-using-a-linux-live-pendrive/

HTH

Edited December 20, 2011 by cannie