How to install Mac OS X upon NTFS partition with Win XP on it?
It's ok, welcome to the dark side.  In answer to the issue...

You can also start by inserting the Install DVD and restarting your computer while holding down the C key

Windows cannot read the disk format but the Mac can.

These instructions are for Leopard but they haven't changed

Apple Support Installing Leopard from DVD   

edit: forgot to add, Choose 'Erase and Install'