I had the same problem. I know the problem lies with iTunes using the GEARAspiWDM driver for burning CDs. This driver is how Apple is able to restrict the number of times you can burn a song purchased from iTunes to only 5 CDs. Unfortunately, this driver stops all over any other driver your system uses for burning CDroms (this includes the default WindowsXP "built-in" driver, or Nero, or Roxio, or anything else you might have installed. Apple support is an absolute disgrace, to the extend that a class-action might be needed to wake them up. I bought hardware from them. Now I'm restricted to the application I must use to put songs I legally own (my own CD collection) onto the hardware device. In the process, Apple now forces me to use a CDrom burning interface to burn songs from iTunes, including songs I did not download through iTunes (in other words, once the song is on the iPod, they control it no matter where it came from).
Wanna fix your problem? Throw a CD-RW into the drive, and it'll work. Possibly something in the GEARAspiWDM driver trying to emulate a Roxio-like "write-at-once", and the CD-R can't handle it. I don't know why, but a CD-RW works like a charm. Steve Jobs is a greedy pr$ck.