The error saying you have a newer version of XP installed... Do you get
it IN the installation?
Have you tried to remove the partition you got Windows on completely?
Have you ruled out a hardware issue on the harddrive?

You can try Dell's 90/90 harddrive diagnostic tool.
Should be available if you hold CTRL+ALT and hit D on the bios splash
screen or from the boot menu (if you hit F12 on the bios splash screen).