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Well, you've done everything correctly! Blow out all of the partitions and create one massive partition. Format it under NTFS and let it install. Your problem seems like a simple old CD access problem. Be sure that your installation media is sparkling clean, as there are large files in i386. If I am reading this correctly, you have done nothing wrong.
For clarification, what version are you installing?
-XP Home
-XP Pro
-XP MCE
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Repair Windows XP Guide --- Resolutions
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