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 http://www.sysinternals.com/ntw2k/fr.../procexp.shtml
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.