I've read on other forums that it should work on Windows 7. I've also tested the game on my friend's computer which has XP to rule out the possibility that the game itself is damaged.

You may need to try some of the troubleshooting steps available here: 

CD-ROM Troubleshooting

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I have managed to install NFS Underground 2 successfully on a computer/laptop with Windows 7.

Genuine Intel U4100

CPU 1.30ghz

RAM 4 GB

The game works so I've ruled out that the disc is damaged. We have all so tried my brother's DVD drive in my laptop and discovered that problem isn't in my own DVD drive. The problem seems to be in the operating system or software.