I agree it sounds like a bad drive.  Have you checked the BIOS Setup F2 to make sure that the CD drive is set to the top of the Boot Order?
I can't get my 2650 to boot past the BIOS when a bootable cd is inserted. I get the message No Boot Device Found. There's nothing on the hard disks. I was able to run diagnostics by running them off of floppies. When I tried to run diagnostics on the CD drive, i get the message The CD is copy protected, try one that has digital data on it. I tried a bootable cd, a software install cd and a music cd, all the same error. I also get the error even if no cd is in the drive! So I am thinking i have a bad CD drive. Anyone agree or think it's something else?
Poweredge 2650 bad CD drive?