I've had two occasions in the past year -- installing on entirely different machines, one with a Windows XP Pro Upgrade disk (pre-service pack 2) on a WinME machine, one with WindowsXP Pro on a fresh machine. Both legitimate, paid-for CDs.
In the first case, my perfectly good Yamaha CRW2100SZ SCSI CD-ROM drive would NOT read the disk. I literally had to go out and buy a crappier (but still perfectly fine) TDK CD-ROM ATAPI IDE drive. Once I swapped this drive in, all sorts of mysterious errors, including blue screen with "SESSION3_INITIALIZATION_FAILURE" and other informative messages ("try cleaning your CD") disappeared instantly, and the installation went completely smoothly.
I even had this problem after getting a fresh WinXP Pro Upgrade disk from MS. All the tech support people I talked to did a lot of head-scratching on this, but never suggested replacing the CD-ROM drive as a solution.
In the second instance, I tried installing a full WinXP Pro CD on a newly-bought Sony DRU-710A DVD-ROM drive, and had precisely the same problem. Unfortunately the almost-year-long gap between the two installation experiences led to my forgetting the horrors of the first time, so I lost another four hours of frustrated confusion, in this case putting together a SATA RAID 0 config for a friend, using a motherboard's onboard Intel RAID config setup. I spent a lot of time thinking there was something wrong with me, with my installation processes, with my understanding of how to configure the RAID 0 setup.
I literally went home, pulled out my old TDK 5300B IDE ATAPI CD-ROM drive from the computer that had saved me from my first WinXP disaster, and lo and behold, it worked the same charm on this system. The SONY DRU-710A works like a charm for every other CD/DVD my friend's thrown at it since, installing loads of software rapidly. ONLY the WinXP Pro legitimate protected-like-crazy (obviously) CD caused a problem.
If anyone else here has had this interesting dilemma crop up, I'd recommend at the least borrowing a different CD/DVD drive for installation. I have no clue as to why certain drives will work with Microsoft's disks, and others will not. Neither of the two drives I've mentioned are listed on either Microsoft's or the respective hardware manufacturer's pages as having any issues with WinXP Pro install disks -- but they do.
Fortunately I suspect MS will be doing away with this obviously broken disc-copying protection system in the future.
rt