I had that error too when trying to install Win 7 on the new pc...spent ages tryng to troubleshoot as i thought something might be wrong with the hardware but as it turned out it was actually the disk itself which was faulty.
Personally I solved it by downloading and burning a new .iso and using my original key on it..worked like a charm. (don't forget to go through step 5G before you burn it to a disk if you don't want Ultimate)
http://forums.mydigitallife.info/thr...s-7-Repository
Don't know about WIN XP right now , but for me CLOD was extremely unstable and had multiple graphics bugs till I switched to Win 7..guess it might have improved a bit by now but Win 7 is still the OS of choice for this game.