Recovery from optical media ignoring read errors

The problem seems to be in Windows I/O scheduling policy. According to what I found here there are many ways for an O.S. to schedule disk requests. While Linux and others can choose between different policies, before Vista Windows was locked in a single policy: a FIFO queue, where all requests where splitted in 64 KB blocks. I believe that this policy is the cause for the problem you are experiencing: the scheduler will mix requests from the two threads, causing continuous seek between different areas of the disk.
Now, the good news is that according to here and here, Vista introduced a smarter disk scheduler, where you can set the priority of your requests and also allocate a minimum badwidth for your process.
The bad news is that I found no way to change disk policy or buffers size in previous versions of Windows. Also, even if raising disk I/O priority of your process will boost the performance against the other processes, you still have the problems of your threads competing against each other.
What I can suggest is to modify your software by introducing a self-made disk access policy.
For example, you could use a policy like this in your thread B (similar for Thread A):

if THREAD A is reading from disk then wait for THREAD A to stop reading or wait for X ms
Read for X ms (or Y MB)
Stop reading and check status of thread A again  

You could use semaphores for status checking or you could use perfmon counters to get the status of the actual disk queue. The values of X and/or Y could also be auto-tuned by checking the actual trasfer rates and slowly modify them, thus maximizing the throughtput when the application runs on different machines and/or O.S. You could find that cache, memory or RAID levels affect them in a way or the other, but with auto-tuning you will always get the best performance in every scenario.

The main problem with Windows Explorer is that it doesn't support resuming copying after a read error. Most superficially scratched CDs, for example, will fail on different areas of the disk every time you eject and reinsert them.

Therefore, with a utility that supports resuming copy operations, it is possible to read the entire contents of a damaged CD with by doing "eject/reload/resume" a few times.

In fact, this is what a utility I wrote does, and I've never needed anything fancier to read scratched disks. (It simply uses ReadFile and WriteFile.)

One step lower would be opening the raw partition (i.e. disk image) by passing a string such as "\.\F:" (note: slashes are literal here) to CreateFile. It would allow you to read raw sectors from a drive, but reconstructing files from that data would be hard.

In fact, the "\.\" syntax allows you to open devices in the "\GLOBAL??" branch of the Windows Object Manager namespace as if they were files. It's not unlike calling dd with /dev/x as a parameter. There is also a "\Device" branch, but that's only accessible via DeviceIoControl() (i.e. ioctl()), meaning there's no simple ReadFile()/WriteFile() interface.

Anything lower level than that would be device-specific, I guess; like reading raw CD-ROM data (including ECC bits) the way some CD-burning programs do. You'd have to do some research on the specific media (CD, flash, DVD) and what your hardware allows you to do on them.

Note: The backslashes seem to get lost on the way to the web page; you need to pass "backslash backslash dot backslash DeviceName" to CreateFile. You need to escape them, too, of course.