CD incompatibility with drive..
I had the same problem.. Macbook didn't recognize my (just bought) XP install CD, and kept spitting it out. Good thing a search turned this thread up, I'd still be panicking.
My linux machine's CD drive could read it fine.. I copied it to a blank CD, which the Mac reads just fine. From there, everything just worked fine.
I don't know if it's the Microsoft holograms, the mac's drive or both. Either way, it really irritates me that a CD would be unreliable. I'd much rather have totally reliable peripherals than an extra 200MHz on the processor.
See if you can get a friend to rip it to a standard CDRW, and good luck.
Alex