This has been coming up a lot in forums, and i ran into it as well. This is how i got windows 7 to install when all else failed.
this IS NOT for dual boot, you WILL LOSE all data currently on your drive,
Back up, or combine with a dual boot tutorial if you want.
(Also great if you cant boot from a thumb drive, or dont have a dvd drive)
download windows 7 iso
download and install 7-zip if you dont have it
download and burn Gparted Live CD
download and burn hirens boot cd (everyone should have this, even if you choose not to follow this tutorial)
Boot from Gparted Live CD, Default Settings (first option)
select 'dont touch keymap'
enter for language, enter for mode
Resize current partition so you have around 2 GB unallocated space
create new partition on 2 GB of unallocated space (change 'free space following' to 0, create as Primary, File system NTFS)
apply, Quit, Exit, reboot into windows
windows will boot, then tell you it has finished installing new devices. go ahead and reboot again if it asks you to
browse My Computer, you now have an additional 2 GB Local Disk.
right-click drag the windows 7 iso into this drive. select 7-zip > Extract Here.
once files are extracted, boot up Gparted once more. delete your other partition**
**if you want to just resize your old partition so you leave your old OS on the drive for backup or dual boot, feel free, but im not covering dual boot here, and im not responsible for lost data, or boot problems getting back into XP.
(leave the 2GB Partition alone)
Then Create a New Partition on the unallocated space (create as Primary, File system NTFS)
apply, Quit, Exit.
Reboot, this time into Hirens Boot CD
boot up Hirens Boot CD, open up Fdisk under partition tools, and set the 2gb drive to active.
this will allow you to boot up this drive partition as if it is the windows 7 disk, bypassing your dvd drive
and eliminating missing drive errors.
reboot (you may have to press esc or something during to boot process to select the drive to boot, but both times i did this it booted right up into the windows 7 drive with no problems.
seems like a lot of steps, but it really only took about 10 min extra once you have gparted and hirens burned.
again, i only did this twice, once to figure it out, and once to write this walkthrough. it worked perfectly both times, but i cant garuntee it will work for you. i just hope it helps
BJ