One more question does your drive read the CD, what i mean is does the drive in my computer tell you what the CD is ?

Ok Try this

Test Disc Read with Copy or Xcopy

To use Copy and Xcopy to test disc-reading, follow these steps: 1.Click Start , and then click Run . 2.In the Open dialog box, type cmd , and then press ENTER. 3.At the command prompt, type one of the following commands:

To copy a folder:

copy <I>discdrive</I>:\<I>foldername</I> <I>drive</I>:\psstest /V
To copy the whole disk:

xcopy <I>discdrive</I>:\*.* <I>drive</I>:\psstest /V /ENOTE : discdrive is the drive letter of the CD-ROM or DVD drive, foldername is the name of the folder containing files that you have to have to access on the disk, and drive is the letter of your system hard disk.

4.Press Enter

5.If you are promted with question wether psstest
specifies a file name or directory name, press F.

6. if you are prompted to overwirte, Press A.NOTE : When you use /V with Copy or Xcopy, the copied files are verified. This takes longer but it makes sure that the files were copied correctly.
Try this and if does not work I have one more thing. Good luck

I just tried that: using this command:

xcopy D:\*.* C:\psstest /V /E
It gives the following

Invalid drive specification
0 File(s) copied

Answering your previous questions:
I've tried a few CDs, some of which I know worked before, and one of which is the Office installation disk which must work!
I don't know if I can boot from CD, but I think so, when I leave a CD in there and restart it does try to reboot from it- I think I should be able to reinstall windows without needing a USB CD drive... Also when I put a new CD in Windows the 'CD' symbol comes up on the mouse cursor and the light comes on so the player at least is recognising the new CD and some of that information gets through to windows, however not the disk contents.
Anyway thanks a lot for the suggestions, much appreciated!

the only other thing I can suggest is this, and then I am out of answers I think

Quit Unnecessary Software

Perform a Clean Boot in Windows XP
How to configure Windows XP to start in a "clean boot" state
this is the link that shows you how to do that.

After you have performed a clean boot of Windows XP, quit any remaining programs. To do so, follow these steps: 1.Quit all programs that are running. 2.Right-click each icon in the notification area, and then click Exit . NOTE : The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an Exit command on the shortcut menu, and you may have to click Quit , Close , or Disable , depending on the commands available for that program.

3.: The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an Press CTRL+ALT+DEL. In the Windows Security dialog box, click Task Manager . 4.: The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an In Windows Task Manager, click Applications . 5.: The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an No programs should appear under the Task list. If any programs appear, click the program name, and then click End Task . 6.: The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an Repeat step 5 until the Task list is empty. 7.: The notification area is located at the far right of the taskbar, near the clock. Some programs that are listed in the notification area do not have an Quit Windows Task Manager.
Good luck.

I also found this link you could check it out as well.
How to troubleshoot CD-ROM drive problems in Windows XP

Thanks again, unfortunately no luck, I'll let you know if the reinstall works!