If you have inserted the CD whilst Windows is running and trying to use setup from within Windows this will fail.
Insert the CD, cancel out of any setup procedure, then reboot the computer.
You will need to check the BIOS before you do to ensure that it boots from a CD first.
Mark
I have P-IV 2.4 GHz, 256 MB RAM, 40 GB HDD computer.
I want to clean install Windows XP on my PC. But when I try to format c: drive using Win XP CD, it goes through the process of formatting and in the end says that it cannot format. Please help.

Chowhound
Comic Vine
GameFAQs
GameSpot
Giant Bomb
TechRepublic