Welcome to the forums.
I always recommend people investing in a new hard drive when testing an operating system. Especially, betas. The time it takes you to swap out drives, is nothing compared to that if you hose your stable OS. There's no guarantee that the service pack is going to be stable during the beta steps, nor is there ever going to be. Even when it's released to the public...
For slipstreaming: Your best chances of getting a more reliable CD... is to use one from the center of your stack... not the first or last CDs in the pack. I've almost always ran into burning issues with them. Next, don't ever set your burn speed to maximum. Especially on a full CD/DVD burn that's going to take the data to the far edges of the disk. Burning at 8-12/16x and getting quality CDs is better than bragging about your 48x CD/20x DVD burns, and having a collection of beverage coasters.
Use quality media... in the world of hardware, you literally get what you pay for.
As far as your key goes... it could have very well ended up on MS's accidental "ooops" list of genuine keys that got blocked. Though MS allows pirates to keep up on security, they've always added a list of keys to their service packs that will no longer allow certain keys to work. If you've ripped a copy of XP to slipstream, you may want to check a certain file to make sure you're not recreating an OEM, Retail or Upgrade CD .. and using a Corp key (or any combination of the latter).