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Is that a separately purchased Mac OS X install disc? Most often the error you describe occurs when trying to use the install discs that came with a different Mac (so e.g. install disc of iMac with 10.5 will only work on that generation of iMac it was sold with).
If this is not the case, reset the PRAM (hold apple-alt-p-r at startup until you hear the startup chime a second time, then release the keys) and see if it now sees the disc.
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