Windows is VERY fussy about the disk media(surface). Where Windows will knock back the install other operating systems will happily install without a fuss.
Code 7 means Windows has found a part of the drive is flaky, this doesn't mean the drive is Kaput! if you can create two partitions and install Xp to the first partition you'll find most likely find Xp will run faultlessly. The prob is ascertaining where the flaky part is! I run the Xp install to the Partitioning page and work up to the fault 10 gig at first and then 5 gig from there on.
The easiest way out of this is to buy a new hard drive. if you go down this road then buy a 7200 rpm drive, you'll see a big speed difference from your current drive.