I have a 1600 and it boots the SME 5.5 CD just fine. I would try a different CD-Rom drive and see if that changes. I would also try burning the ISO on a 650MB CD as not all CD-Rom's can read the higher capacity disks.
As far as keeping the Compaq diagnostics partition, I went through the same issues and determined that it was MUCH more convenient to access diagnostics with SmartStart.
The latest raid configuration utilites are ONLY available on the SmartStart CD anyhow.
Chaloner Hale