Okay mate, first things first. Create a new user account in System Preferences and see if the problem carries over. If it doesn't then you can be sure it's a software problem and you can be sure it's something in your original account's Home folder.
While we're waiting, a quick PRAM reset may help too.
Well, there are still a couple of things to try. Insert a CD (preferably a commercial CD with no DRM, not a blank or burnt CD). Does it recognise this? If so, it could be a laser calibration problem.
Also, try power cycling the drive by unplugging your machine overnight from the mains. Plug it back in the next morning and see how it fares. Good luck mate.
I'm glad the power cycle worked. Considering it did work, that means the problem was firmware-based and has now been remedied. However, it is possible for hardware to corrupt the firmware so this may happen again although I personally consider it unlikely. Nevertheless, If you need an optical drive that much then I'd consider getting an external Firewire or USB one. That way it can act as a backup for any machine, not just your Power Mac. Also, it'll be a backup rather than a replacement.