If the Add Printer or the New Hardware Found wizard consistently fails for a particular printer, there may be an information file on your computer that is causing this. One way this might happen is if you upgrade from Windows 95, 98 or ME to Windows XP without first deleting the printer.
It's important to only install printer drivers that are designed and built specifically for the Windows version you have. This is particularly important for Windows XP; many of the CDs and floppy disks distributed with printers (particularly older models) do not have Windows XP drivers - check the printer manufacturer's web site for printer drivers for the version of Windows you have.
The Microsoft Knowledge Base article at http://support.microsoft.com/default.aspx?scid=kb;en-us;298370 has a workaround for a known problem in Windows XP.
If that doesn't help your situation, do the steps below and also have a look at How to clean up printer drivers.
open a Windows Explorer window and navigate to %systemroot%\inf (usually c:\windows\inf)
scroll down until you see the files that start with oem
open each oem*.inf file one a time (double click should open it in Notepad, or right click and select Open With...) and see if it relates to the printer causing the problem. There is usually a comment inside the file that says what model(s) of printer (or other type of device) it pertains to. When you find one that relates to your problematic printer, delete it and any .pnf file with the same name. Among other things, these .inf files are used when XP detects a "new printer" on the parallel port. If the .inf file is for a driver that is not XP compatible, this can cause problems.