Almost sounds like you have a bad CD drive to me. Windows recovery disks won't work, and then Ubuntu one fails as well with a read error?

Is X maybe trying to start up, but failing for some reason and then Ubuntu is just dropping you to a login prompt?

See if you can have a look at /var/log/Xorg.0.log for errors.
Although the fact that you can run startx and it launches (with some applet errors) leads me to believe there's nothing wrong with X.

Just need to poke around the system to see if you can get an indication as to what's erroring out.

check output of
dmesg | more
more /var/log/messages
more /var/log/Xorg.0.log
more /var/log/syslog

Ubuntu has a recovery mode. If you hit Esc right before it starts to load the kernel, you can select the second option in the grub menu which is recovery mode.

In the menu that comes up, one of the options is "xfix - Try to auto repair graphic problems". Might work for you.

Go here...has all kinds of distros that can be run from a USB thumb drive, and instructions for how to install them.

http://www.pendrivelinux.com/

DSL can be found at http://www.damnsmalllinux.org/
Sounds like that computer is old enough that it may not support booting from USB. You might need to burn a CD and boot from that.