USe the XP Disk but go tot he Recovery Console. Run chkdsk. There are bad sectors and that on the drive. Most likely near where the bootloader is being placed and causing the installer to not see that the install was already started.
Just for the record, when it says 'Disk Read Error' it isn't talking about the cd/dvd disk. It's talking about your hdd.
Just follow the instructions Mak gave you, and if that doesn't fix your problem you might want to look into buying a new hard drive.