Alrighty, this computer is either actively resisting a reinstallation of Windows, or there is a problem with the CD drive
Looking at these:
1.) CD drive might not have power, or enough to work sufficiently. Reading a disc doesn't seem to fall in this category, though.
2.) CD drive is not powerful enough to read the disc, or specific, damaged parts of the disc newer drives may easily be able to read comparatively.
If possible, try out a different CD drive for the Windows XP installation. I'm curious, however, as to how you installed XP originally on this machine, or if you had any problems prior.
The disc included with my Seagate drive could check hard disks, format them, and partition them on boot. Unfortunately, I haven't been able to find it, but I found something better, and it has this Seagate utility within it.
http://www.ultimatebootcd.com/