|Hi Toomas, there's nothing wrong with you disc but the problem is with the operating system.|
try this. (since you do have the xp installation disc) It will work
Boot the system using the Windows XP CD-ROM. In the first screen when the Setup begins, read the instructions press "R" (in the first screen) enter the Recovery Console. Type-in the built-in Administrator password to enter the Console. You'll see the prompt reading C:\Windows (Or any other drive-letter where you've installed XP)
Type the following command and press Enter.
EXPAND USERINIT.EX_ WSAUPDATER.EXE
Quit Recovery Console by typing EXIT and restart Windows.
You'll be able to login successfully as you've created the wsaupdater.exe file (now, a copy of userinit.exe)