If you format the drive from Xandros, you will be creating a new Ext2fs file system and be right back where you are now. You don't want to format--you want to erase the drive and remove its contents.
The XP CD should be recognized and boot up regardless of what is on the hard drive.
Is the CD set to boot before the hd in BIOS setup?
Once you get setup started, you should be able to repartition and reformat both of which are part of XP setup.
But, if you do have any problems, you can use nearly any free partitioning app to remove the Ext2fs or swap partitions from the drive.
CloneZilla GParted LiveCD (Complete partitioning and drive imaging/restoration tools)
Gparted LiveCD Parted Magic Vista Recovery Disk (Shrink, expand, create, delete partitions)
XP Recovery Console CD image (Create and delete partitions with diskpart.exe)
Partition Logic Ranish Partition Manager Cute Partition Manager