Are you trying to create a dual boot system or completely wipe Vista out and use XP instead? Not the it really matters, the procedure is still the same, just that you might want to not remove Vista if the machine is new. It's possible that it'll void your warranty if you remove Vista and install XP in it's place.
Back to the XP cd. You're getting that message because you're trying to run the XP setup from within Vista. As it's a bootable CD, providing your machine is set to boot from CD before the hard drive you should be able to restart the machine with the XP cd in the drive and then press any key when (if) prompted. This should take you into the text mode setup for XP. Be aware that if your machine is based on SATA drives instead of IDE drives that you may have to download the SATA drivers in order for XP setup to find the hard drive.