Stuck on "Setup is starting windows"

Question

Been at this for 3 days, no one at Apple support has encountered my problem, and haven't found a solution anywhere on the net. Here is the scenario:
Computer is a new iMac 20" 2.66 GHz Intel Core 2 Duo, with 4GB RAM, and using the included Boot Camp Assistant 2.0 that cam pre-installed.
After running Boot Camp, I chose to partition 32GB for the Windows installation. I have tried with 2 original personally purchased Microsoft authentic CDs (Microsoft just sent me the SP3 a few days ago). One is a new Windows XP Home Edition OEM Service Pack 3, the other is the same but Service Pack 2. Once Boot Camp prompts to insert the CD and I click to install, the iMac restarts, and I get the Windows Setup blue screen. Along the bottom I see how it starts loading all the preliminary drivers needed for installation, and then... and then.... "Setup is starting Windows" across the bottom white strip, and that's the end of it. I hear the CD stop spinning after 30 seconds, and nothing ever happens after that. No next screen to choose which partition to format or anything.
Both discs are in perfect conditions, no scratches or smudges or dirt. I tried using the newer SP3 disc on an older PC I have to see if it would reformat and re-install Windows on it and it worked perfectly. I didn't authenticate it since it will be probably scrapped later anyhow. So the disc works fine. A tech at Apple phone support advised me to try unplugging everything except the keyboard and mouse, that didn't work either.
I'm exhausted, and really have tried all my previous tech experience at no avail. Any kind sould who can actually respond with a workable solution will be greatly appreciated.
In God's Harmony,
RODDY

Answer 1

SOLVED
Well, I'd like to thank all of you for your input. After much prayer and extensive search, I was finally able to install Windows XP SP3 on the new iMac. I kept the 32GB partition created by Boot Camp 2.0, but I did 2 things differently when trying to do it this time. The apple keyboard (since it is so short, really Apple, you had a usable length with the Pro models 10 years ago) was connected to a 6 foot USB extension cable to reach the back of the monitor. This is because the iMac is on a computer desk with a pull-out desk to place the keyboard and mouse. But I disconnected the extension, and plugged it direct this time. I didn't leave the Windows XP SP3 disc in this time, I just restarted, and while it restarted I pressed and held the OPTION key. An icon of just the "Macintosh HD" came up on the screen, at which time I inserted the Windows CD, a few seconds later, an icon for the CD appeared to the right of the Mac HD icon. I selected the CD, and again it went through loading drivers getting ready for windows setup, same as before. I cried out to the Lord, and YESSSSSSSSS, it finally asked me if I wanted to format a windows partition! Needless to say, it went through the entire process fine.
I didn't need to update to Boot Camp 2.1, sp3 is working fine. Installed and ran a few programs, connected to the internet, and so forth. Although I left the network connection to the internet disabled, don't want to use the Windows side for the net, too many virus problems possible.
I shut down the computer, re-connected the USB extension cable, and when I went into the Windows side, guess what? The mouse and keyboard locked up completely. I connected the apple keyboard direct again, and then I had control again. Using the USB extension cable on the Windows side is the only problem, because the Mac side works fine with it. This will be a new post because I really need the extra length because of the distance. But thanks to all.
In God's Harmony,
RODDY