Since you were able to at least start the XP recovery process it is unlikely that the processor is fried. If it was, you would get no power-on tests at all, much less be able to start the recovery disc process. That narrows the problem down to the motherboard, the RAM, the video card and the power supply.
It may be in your best interest to take the system to a local repair shop whwre they have spares of all the components. You could end up buying most of the components for a brand new system in the process of testing your current one.
The best way to test the system is to replace the major components one at a time to see which one is bad.
If you want to keep testing the system yourself, your first priority is to make sure that the power supply unit (PSU) is OK. A malfunctioning PSU could really damage your system. Is there any way you can borrow a PSU for testing purposes ? You only need a 350 watt unit (or bigger). You might have to resort to buying one for testing purposes and then return it if this does not fix the problems (or keep it as a backup).
Start testing your system with only the CPU+heatsink/fan, RAM and the video card installed. That is, disconnect your hard drives, floppy drives and any cards that are plugged in save for a video card.
Do you have 2 or more sticks of RAM ? If not, you will have to get a hold of another stick of RAM. If so, try keeping only one installed at a time and try the recovery disk procedure. Test all the sticks of RAM individually. You do not have to complete the reinstall process - you're just trying to locate any out-and-out bad RAM modules. If your system gets at least to the point of starting the system recovery process, reattach the optical drive and test the RAM sticks individually with Memtest86
. It is downloadable in an ISO disc image file that must be burned to a CD using Roxio, Nero, Adaptec, Sonic or the free program CDBurnerXP Pro
The same goes for testing the video card. If the previous tests were successful, replace the video card at least temporarily to see if this cures the problem.
If testing or replacing the RAM and replacing the PSU and video card does not fix your system, then the problem must be with the motherboard. Fortunately, AFAIK all motherboards come with at least a one year warranty. You might want to try exchanging it at the place you bought it from, though it has been more than 30 days since you bought it. In any case, have the recept for the sale handy.
I hope this helps to diagnose your system.