Notwithstanding what you found when you opened the cradle, I am inclined to suspect a connection or driver issue. You wrote that you got the message "This device can perform faster." This indicates that you have either plugged the USB 2 cradle into a non-USB 2 port, or Windows for some reason "thinks" it is just a USB 1.1 port.
Do you know for certain whether your computer has USB 2 ports? If you only have USB 1.1, Windows XP is not going to load the USB2 driver, which is what the cradle needs to operate properly. You may have to download the USB 1.1 driver for the cradle to function (
http://www.phatnoise.com/downloads/ISD_setup_5_04.exe).
If you know you have USB 2, but have plugged the cradle into a port on the front of the computer, try plugging the cradle into one of the ports in the back. (This assumes you have a desktop computer, otherwise never mind.) Many devices, particularly storage, are picky about where they are connected.
If you have USB 2 and nothing else works, it could still be a driver issue. You may need to get into your Device Manager and sort out which driver XP is using for USB. In most cases the XP driver installs by default, but depending on your motherboard chipset, there may also be drivers by Intel, VIA, Ali, etc. Certain drivers work better than others. (I can explain in more detail but first try the steps above.)