You are supposed to boot from the CD, not run it from within Windows - that's only for upgrading and you can't "upgrade" XP64 to XP32.
Make sure you have enabled booting from the CD in the system BIOS, press any key to boot from the CD when you are told to. You need a drivers floppy if you are using SATA.
Choose to install Windows, delete all the partitions (unless you want to keep some data), recreate them if you want something else than a single partition spanning the whole hard disk.