Be careful, that might very well be a red herring. If you have e.g. occasional RAM errors, it can be completely random if it panics or nor. The first burnt disc may have worked at a second or third boot as well.Burned another copy of the OS X 10.3 Install Disk 1 using an identical noname CD-R as the kernel panic one, and, what do you know? Kernel panic!
Tried again with a Memorex CD-RW I had lying around... and it went perfectly fine!
It is certainly very unlikely for a CD-RW to work when a CD-R does not. Also, if the disc was burnt with no errors, it will either work in the target machine or not. I don't see how it would only work to some extent and give you a kernel panic instead of a read error. Does not make sense to me.
If you can, run the Apple hardware diagnostic disc for that model. Should be on archive.org as well.