There are some considerations before you even start to do this:
Does your Win 7 licence come with the option to downgrade to XP. If not you cannot do it.
If it is possible to downgrade you need to be certain that XP drivers are available for the various items of hardware inside the PC. Graphics, sound, chipset etc. XP is old now and drivers may not be available.
Having settled all that, I've had this issue in the past. The only way to cure it is to take the machine off the network and then re-join it. But not being able to log in this is impossible. I think you will find it will not even log in in safe mode.
You must reinstall Windows to get it going again.
You need to look at the boot options again to make sure thatn the Optical drive is first in priority.
Also not the message to press a key to boot from CD. if you do not do this it will ignore the CD.