I had a similar problem last night when I was trying to run MSWord 6 on my XP system. I had a friend who explained to me that XP doesn't really have a true DOS mode to speak of, and therefore can't run a lot of programs that rely on DOS-based installation programs (Although why this would affect a Windows-based prog like MSWord, I dunno)
But, if I remember correctly, BG1 has one of those old DOS-style installation programs like the old SSI games like Strahd's Possession and Stone Prophet, so that could be the issue. Then again, I'm only going by what he told me
What he suggested to me was to do one of two things. Either create a boot disk with an old version of DOS to boot the computer up with in order to run the installation program (the game itself should work through Windows, just not the installation program). I tried that myself, but I couldn't get it to recognize the CD-ROM and I couldn't find a driver for it on the system to put on the boot disk.
The other, more convoluted suggestion he gave me was to set aside a partition on my HD and install an old version of DOS, or even just an older version of Windows on it to run those kinds of programs.
So, I'm in the same fix you are
If anyone else here has another, easier suggestion I would be very interested in hearing it as well
Not just for my MSWord problem.. I have tons of old games that just refuse to work on XP...