Booting from the install DVD is completely independent from any existing systems on your hard drive. Technically, it's possible even if your hard drive is missing.
The grey screen with the instructions in multiple languages in the box in the middle is a kernel panic. It's just telling you how to hard-reset the power supply and start over.
To be clear, when you boot with the option key held down, you should be seeing the boot disk selection screen long before any kernel is even loaded, hence no kernel is running to panic in the first place. If the option key boot disk selection is not working, then something is wrong either with your keyboard or with the computer's logic board(/boot ROM/EFI).
After you've done an option-boot, you should be free to insert the installation DVD; it will show up next to your WinXP partition after a moment. Select it and click the arrow to boot the installer.
(The shortcut for this is to boot with the DVD already inserted and then hold down the C key. Also, to be sure, whenever booting while holding a key like this, until you've gained some experience, hold down the key from before you hit the power button, and then don't release it until the system has reached the point you want it to. Also, keyboard boot modifiers need to be inputted on a wired USB keyboard.)
If you receive a kernel panic after this point, then likely you are using an outdated installer DVD. Brand new Apple hardware often requires drivers that are only present on the software restore DVD that came with the computer or on a retail disc that contains the latest subsequent point release of the OS.
