Yep. , now it is much more clear.
If you reduced the "thing" that you see as C: from the original 604 Gb to roughly 524 Gb in order to create the 80 Gb "thing" that you see as W:, then the "W: thing" begins past the 128 Gb mark in any case, no matter if the "C: thing" is actually at the beginning of the disk or not (usually it comes after the "system" partition, which should be normally 100 Mb in size).
The issue is detailed here:
It is possible - for any reason - that the EnableBigLBA setting is not in the Registry of the Setup CD you made nlite should have made that set properly, but you never know.
But there is also another problem.
The "system" partition (that MS insists on calling the other way round) is actually the "boot" partition, see:
Basically what you see as "system" and without a drive letter assigned is a primary partition with an ID of 0x27 (this is a "special" partition ID that makes Windows 7 NOT assign a drive letter to it), which is actually a NTFS formatted volume inside a partition that is marked as "Active" (and that would normally have a partition ID of 0x07).
Windows XP knows nothing about a partition with ID 0x27, and this is very likely to create issues when installing, once the other issue has been solved.
Bear with me, please.
Right now your PC boot sequence is the following:
BIOS->MBR->bootsector of the Active partition (the "no drive letter", "system" partition with ID 0x27)-> BOOTMGR ( residing also on the "no drive letter", "system" partition with ID 0x27)->choices in \boot\BCD( residing also on the "no drive letter", "system" partition with ID 0x27)-> WINLOAD.EXE (residing on the "C: thing")-> Windows 7
The normal booting sequence of XP is instead:
BIOS->MBR->bootsector of the Active partition (which cannot be of type 0x27, and it is usually at the same time "system" and "boot" volume, and that in your case will probably correspond to the "W: thing" )->NTLDR (residing on the "W: thing")->choices in BOOT.INI (also residing on the "W: thing")->Windows XP kernel (also residing on the "W: thing").
In other words, even once we will manage to have the XP install "see" the "W: thing" you should NOT proceed to install.
IF you do install in that situation AND the XP install gives no issues, you will lose the possibility of booting to the Windows 7 (and it might be tricky to fix the situation), while IF you do install in that situation BUT the XP install has any issue, you will have a completely NON bootable system, i.e. both XP and 7 will fail loading)
All MS OS installs are "predatory" in the sense that they take over the boot sequence, altering it along the lines of what they think is "best".
Of course when you install a later OS (let's say a Windows 7 after having installed the XP) the setup has an automatic option to "import" the existing previous OS booting, but obviously a previous OS knows nothing about a later one and simply writes the "own" boot sequence.
A procedure is given here (option 2):
BUT it is NOT advised (by me) to follow that method, as it gives you not any control on drive letter assignment (in the XP) and it is more generally "risky" and needing tools that I (personally) do not recommend.
Still it is useful as a reference.
Right now you did what is detailed on that guide under "option 2" up to point 5, I believe.
1) What do you see right now at that step?
(I need to understand what is the situation now, before suggesting you how to go on).
2) Can you (if needed) re-create the .iso (with or without nlite)?
3) Do you have a PE of some kind (please describe) or the Windows 7 install DVD?