Put the Windows 7 disc in and choose upgrade then after that it will restart.
After you have acepted the upgrade it will allow you to install the sp1 .
Once Windows 7 has upgraded ,but still keeping your system in tact ,will start the whole update process. After about a hour or two of updates it will install sp1 with no issue .
Also if you are useing a highend gaming card virus protect etc it might keep it from installing as well