Check your xp cd that it isn't scratched or has dirt/fingerprints on it. If the disk is dirty xp will generate errors because it can't read the disk.

And you cannot format C when in C/windows because the drive is being used to get to DOS emulator. XP doesn't have DOS per se, and the only way to format an NTFS system is to remove that file system first. This isn't like the old win98 fdisk, format days.