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Does the CD boot at all?
How did you burn the ISO files to CD? XP does not have any built in capability to create CDs from an ISO file. You need Nero or Roxio or you can download a free ISO burning tool like isorecorder. If you look at the CD and all you see is a single ISO file then you did not burn it correctly. Extracting the files and copying does not create a bootable CD.
I would change the boot order to CD, FDD, HDD, LAN. LAN i.e. PXE is typically used to install an OS from a server or loading an OS for a diskless workstation. Usually if a server is not found the PC should try the next boot device.