My first guess would be the source of XP. OEM versions are usually tailored by specific manufacturers. There are many issues using OEM disks.
Did you have any issues in Activation? Did you use the Product Key off your machine or did the OEM have a key?
When you say you tried to load an old version of XP but "it couldn't read the volume license"; was this also an OEM disk?
Can you download anything from Windows Update?
In installing XP there is no reason to do any manual formatting. XP takes care of that the way it wants to. Here is a good install guide:
http://michaelstevenstech.com/index.html
I would try installing from scratch.