The reason you are getting this error message is because BootCamp is only created to work with the default system settings and that is having the a single partition on your boot disk not multiple. So in order to get this to work you actually have to combine your partitions back into one and then BootCamp will be able to create a new partition for Windows and you should be ready to go.
Alternately, format the drive in MS-DOS format with X, then install the operating system on it.
Use Vmware Fusion to load it or change the boot order.
The only problem with that is that the HDD is only 1 partition, its not seperated. When I go to partition it in the Disk management, it tells me that I need to format the HDD which is what I am trying to avoid
Add a hard drive. In X format it as MS-DOS. With the X drive disconnected install XP.
Reconnect the X drive. Change the boot order to boot from either X or XP.
Install Vmware Fusion optionally to use XP within X.