Unfortunately that error message does refer to a damaged disc. There is a handy article at Sims2wiki about cleaning damaged discs:
http://www.sims2wiki.info/wiki.php?title=Game_Help:InstallIt also provides a link to the official site re Copying Install Files to Your Hard Drive: "You may have better luck if you copy the install files from the disk to your computer's hard drive, then try to install using the files on your hard drive, rather than trying to read from the disk. The flaw with this method is that if the game installer can't read the files, the chances are that explorer won't be able to anyway, and if Explorer does happen to have more luck, it could literally take hours."