I had a similar problem when I first got my iBook (12" 1.3GHz) last fall.
Inserting a CD or DVD resulted in a 50% chance of read failure/eject.
Inserting a blank CD resulted in 50% chance the drive would simply eject the disk. The other 50% of the time, the disk would spin up, but no burning options would ever appear. Finder knew the disk was blank, but was unconvinced it could burn it.
Convinced my combo drive was bad, I called AppleCare.
They had me try the following:
1) Repair permissions, reboot, and try again (I had already tried this)
2) Create a new user and see if drive behavior was any different
3) Reload OSX
I had no luck until reloading OSX. To this day, I have no idea how such behavior could be related to permissions, but it certainly seems like that's what AppleCare was getting at. After a clean install, my combo has been able to read DVD's and read/write CD's perfectly ever since.
Good Luck!
