I suspect that the problem could lie not with the software but with the hardware. Some CDs, especially re-writables, will only read from the drive that wrote them. Indeed, I have found re-writables that will read in another machine (i.e from a desktop to a laptop) suddenley stop reading for no apparent reason. If you still have that old machine and can recover the old CD-drive, try installing that as a slave in your new machine.
If you choose to go the multi-OS route, you cannot use XP multi-OS support unless you install SE first and XP next. To do as you suggest will require you to use something like Partition Magic Pro.