You need to boot the DVD to install.
First make sure you have the latest BIOS version from Dell's Support Downloads webpage for your service tag - you should have at least v.06. If so, reset the CMOS: Clear CMOS - 3 Ways to Clear the CMOS - Reset BIOS Boot DVD
, Use Custom install>Drive Options (pictures in Clean Install tutorial above) to delete partitions, Create New as you wish, then Format before installing to first partition. Ignore the 100mb System Reserved partition issued by installer - this conveniently places the DVD Repair console on the F8 Advanced Boot Tools menu.
If install fails, try removing all but 2gb of RAM to try install. Post back the exact error message.