windows 7 upgrade from XP error code 0x0000007B

I am trying to use the windows 7 upgrade from XP when I do I get a reboot to starting windows (For about 20 minutes ) then I get a blue screen. with error code 0x0000007B: I have unpluged all my usb to no avail. I have also tried to run the upgrade disc from safe mode. Each time I still get the same error I do know that My current wireless driver is not compatable. but was planning on installing the new one after upgrade

Dell DIME521
I have 20 gigs of hard drive space to spare
AMD 64 processor 3200+
4 gigs of ram 2.0GHz

On my upgrade disc there is no option to format. it asks which disc drive or partition.
Then starts the uprade
Ideally I want to put it on my 2nd drive (SATA) but I could not do it so I tried on C with same problems.

This is what I am doing

1. On the Install Windows page, click Install now.
2. On the Get important updates for installation page, we recommend getting the latest updates to help ensure a successful installation, and to help protect your computer against security threats. Your computer will need to be connected to the Internet during Windows 7 installation to get these updates.
3. On the Please read the license terms page, if you accept the license terms, click I accept the license terms, and then click Next.
4. On the Which type of installation do you want? page, click Custom.
5. Choose the partition containing Windows XP which is C
6. Then it starts doing the 'upgrade'

You need to boot from the DVD to get the Custom>Advanced drive tools to delete, create New and Format.

There can be problems running the installer from XP.

You will get a windows.old folder with your XP in it, but you need to back up your files when you do any install anway, so why not boot from the installer and get the cleanest possible install?

When I boot from the disc it says loading files with status bar then goes to the starting winds screen and stays there