try to isolate the problem by switching out components, take the cdrw you have, disconnect it and replace it with a cd drive that you know works, if you get that same erro, it probably isn't the cdrom. next try the hard drive, try switching it with another that you know works,
omg, lol i just realized that in my older comp the PSU went and i got that same error and it said insert disk. i am pretty sure the hard drive was fried by the PSU dying, so maybe the hard drive is defective or was fried. although mine may have several corrupt files in the boot sector from the PSU, but that HD shouldn't as it had no OS on there before you tried to install xp, right?
AMD Athlon XP 2500+@ 200x11 - EPoX 8rda3I - Thermaltake 420watt silent PSU - 2x512MB PNY PC3200(DualChannel) - TT HSF - PNY 5900SE, 128MB DDR, 256-bit - - Toshiba SD-R5002: DVD-RW - NEC DVD-RW - 2 Antec 80mm fans - 1 Delta 92mm fan - 1 Antec 120mm fan- 1 TT 120mm fan - Windows XP Pro - WD special edition 80GB 7200 RPM- Seagate 80GB 7200 RPM 8MB cache - Onboard Sound - Onboard Ethernet
ACER Travel Mmate 4000LCi - Intel Pentium M 710 - 15\" XGA TFT - 512MB DDR333 - 40 GB HD - DVD-rom/CD-RW Drive - WLAN 802.11b/g - Winxp Home - Intel Extreme Graphics - Average Battery Life: 4-5 hours - 6.4 lbs