Your current problem is your system on your PC is more up-to-date than your install CD (Windows checks the dates on the core files on the PC - if they post date the CD you must be doing something wrong (After all who would want to downgrade a Microsoft installation

??!)
so it prevents you doing it.
There are a variety of fixes depending on what you want to do and how your current system was installed.
I'm assuming from the thread that you don't want to try repairing your current installation and just want to wipe the computer completely and start again.
If the computer arrived preinstalled with Windows XP and a reinstallation disk you should use this and your computer will be restored to its "out of the box" state requiring updating to SP2 2007. The restore disk will take care of the system activation and serial numbers.
If you upgraded to XP from an earlier version of Windows you will need to have the previous system's install disk and the upgrade installation CD key handy when you reinstall.
If you want to reinstall over your current installation you will need either an SP2 install disk for your version of XP (you can "borrow" one of these) or to create an updated installation disk by combining your original install disk and SP2.
You can completely remove all data from your computer and reinstall using your installation CD. You need to erase the drive first so the version conflict no longer exists. This is usually straightforward but occasionally there are problems with activation codes on the case not matching the disk you have been given

and you may need to go back to your supplier for advice as Microsoft do not support OEM reinstallations.
Make sure you know the CD Key used for your system before you remove it. Download a utility like
Belarc Advisor (free) to collect this information from your registry.
Also download drivers for your hardware in advance - particularly if you have a SATA hard drive.
If you know the manufacturer and model of your hard drive you can download a manufacturer tool to prepare your drive for reinstallation.
This site can take you through the various installations.