It looks like a HD problem, especially your BIOS is reporting HD failure. I did have the EXACT problem with a desktop PC some time back, and went an bought a new HD. When I tried to install XP, it also said it couldn't read fies from the CD, and froze. I tried a couple different CD's and still ran into the same problem. I thought, ok New Hard Drive, then it must be the Motherboard or HD controller or something on the board. I bought a new Mother board, processor, and had the new Hard drive. I tried to install XP after putting it all together, and STILL the same problem! I put in a new power supply, thinking the old one may be going and voltage was fluxuating or something... Still didn't work!!!! I was going crazy. As a last ditch effort, I tried different memory. That was the problem! When I put differnt ram on the board, XP installed perfectly the first try! Even though the BIOS never reported a ram problem at post when it was checked.
So to make a long story short, TOO LATE

Finding out it was a $50 ram stick cost me around $600! When memory is going bad, it can seem like a HD problem, as it will corrupt data initially in memory, and thus the corrupt data will written to the HD, making it look like a bad drive. Sometimes it is just trial and error. If you have 2 sticks of memory in the laptop, try removing one, if it still happens, switch that one out for the other and trying again.