I used to get this allot and my work around was to either... Remove the hard disk and connect it via a special connection cable and plug it in to a regular computer and install it that way. Another was to boot to DOS with CD-Rom support via a floppy and then copy the XP disc to a "install" folder on drive C:\ and then run the installer from the hard disk.
The final way to deal with windows XP is to install Linux Ubuntu, which is what I recently did when a genuine copy of XP refused to work after SP3 was put on the machine.
It is possible to with a Virtual Machine to boot to Ubuntu and run a copy of Windows XP like you run a program in a window. Thats the next thing I will be considering attempting when I can get the time to install XP again.
Look for a boot disk that goes by the name of "Ultimate Boot Disk" like http://fileforum.betanews.com/search?s=boot+disks&x=0&y=0
This will boot up and allow you to properly format the drive ready for install.
Another place is http://www.bootdisk.com/ which you may find a DOS based boot floppy with CD-ROM support...
If you search online for boot disks with CD Rom support, you will find plenty of them that allow you to get access under DOS for your CD Rom, you simply copy the installer CABs directory from the XP install disk to your hard disk and then begin the install.