Did you boot into the XP installer and attempt to format D?
The drive will need to be formatted using XP's NTFS which has a different partition table.
If this fails, restart Windows 7 and in Disk management, delete the D: partition, then boot back into XP disk and try to create a new partition to format.
Is it prompting for any drivers
for your DVD or HDD? Next would be to try to insert storage drivers (SATA or IDE?) when/if XP installer prompts for them.