If you are trying to run the CD from within windows 7, I don't think it will work. Boot directly from the WinXP cd. I assume you are trying to get rid of windows 7... have the XP install delete the win 7 partition, then create a new partition for XP.
Installing XP the first thing you have to do is go to Control Panel, Administrative tools, Computer Management, Disk Management. Left click on C: then right click to shrink the volume. I split the hard drive in half making it my D: drive. Exit and close CP.
Go to cnet.com search for EasyBCD 2.1.2 download and install or any place that has a free copy. Do your home work, Read up on how to install the dual boot
Restart computer, press the F8 key will get you into the boot option, boot from the cd drive and install XP to drive D:
Once this is done it will boot only into XP, here you need a copy of Win7 to Repair. When the INSTALL comes up DO NOT INSTALL, click on repair Win7 will then repair your computer to boot back to 7.
Once your are back into 7 run the EasyBCD program when it comes up you just hit ok. Now here if you did your search and read up on installing dual boot with bcd you will be able to set it up and restart machine with a dual boot for 7 or XP
I may have forgot a step or two that is why you search out and understand the BCD program. I did this on my Aspire One, I'm not going to say it was easy but then again if you've done your homework makes things so much easier.