He is not yet at that point, this is before the initial Windows files are put onto the system and before the hard drive is partitioned and formatted.
As for the problem... Like the other guy mentioned... Is it a pirated version? Does the computer appear to be frozen? If the computer is locking up, it could be that there is something wrong with your hard drive. It could be that there is some corrupt data causing it to do this, or it could also be that the hard drive is damaged or configured inproperly.
I'm pretty sure that it has to do with your hard drive, since after you press F8 is where I believe it checks for previous versions of Windows on the disk and then lets you partition and format. I suggest perhaps trying to format with an MS-DOS startup disk first and format using that. Then try installing Windows XP again.