I am assuming that you are using the OS CD and you started the computer via the OS CD.
Now the Apple Knowledge Base gives these helps:
If you encounter this error while installing software from a CD-ROM, first make sure the disc is clean. Clean the data side of the disc by using a dry, lint-free cloth to gently wipe the CD from the spindle hole to the outer edge. Do not wipe in a circular fashion. If you have a CD-ROM lens cleaner disc, use that to clean the drive.
If the issue persists, it may be due to incompatible hardware. Try one or more of the following:
* Disconnect all external devices from the computer other than the display, the Apple mouse, and the Apple keyboard.
* Make sure that the proper RAM has been installed in the computer. Some computers require certain RAM speeds, or that RAM be installed in matching pairs. For more information, see article 20025: "Apple Memory Guide."
* Check the internal cabling connecting SCSI or ATA devices to see if the cable has become crimped or wadded causing internal damage, or physically pierced by an internal protrusion.
* Remove any internal hardware added post-factory, such as hard drives or CPU accelerators.
If the issue persists, replace the Big System Morsel:
* Drag the Big System Morsel from the CD/Software Installers/System Software/Mac OS 9 Folder.
* Place it on the root level of the Hard Drive.
Often the suspect software components can be bypassed and alternative methods used to install the software. Two alternative methods of installing the software that usually work are:
* Connect an external CD-ROM drive to the computer and use it to install the software.