What we really need to know is the configuration of your machine with particular regards to the hard drive setup.
First of all, are you using a PATA, SCSI, SATA or SATAII interface? What physical drives have you got in your machine? Are you using a RAID configuration? Though Windows XP setup should detect things such as RAID or SCSI and load drivers, there are no guarantees and you may have to run a boot disk from the device manufacturer to detect your drives on boot. You will get the option to do this during the setup sequence (It says something along the lines of Press F12 to load a 3rd party device driver at the bottom of the screen).
As for the faded installation button, that is a result of running a newer operating system. The same occurs if you run a Windows 98 disc on a Windows XP machine - It won't let you run setup. If you want to overwrite your current operating system, you have to do it from setup on boot.