Boot off the windows 7 CD, when it loads you'll have the option to format the drive before installing windows.
That means your not booting from the CD. You need to set the boot order to CD first in the bios:
http://www.ehow.com/how_5980750_do-cd-using-windows-xp_.html
Don't worry about that for now, can you boot off your Windows DVD now?
Once you've finished installing just change the boot order back to the original setting.