There are 2 solutions to this:

1) Uninstall DAEMON Tools before you install Windows XP SP2. You will need to reboot after uninstall DAEMON Tools. This is the recommended solution.

2) Download process explorer from
You should then run Process Explorer and click on System. In the lower pane you should see C:\windows\system32\drivers\atapi.sys. Right-click on it and click "Close Handle". You can then continue installing Windows XP SP2 without rebooting first. This solution should only be used by advanced users.