Where did you get the Windows 7 installer? I hope it's a genuine copy. If it is and is in an ISO format then you probably didn't burn it to a DVD properly. Transfer the ISO to a disc or USB flash drive with this:
http://www.microsoftstore.com/store/msstore/html/pbPage.Help_Win7_usbdvd_dwnTool
Now in case you don't have a genuine copy of Windows 7 Home Premium installer, download one of these Windows 7 Home Premium Edition SP1 (bootable) ISO images:
x86 (32-bit) version (2446MB or 2.39GB) -- http://msft.digitalrivercontent.net/win/X17-58996.iso
x64 (64-bit) version (3167MB or 3.09GB) -- http://msft.digitalrivercontent.net/win/X17-58997.iso
It will require a valid product key of course. Don't ask me for one as I've already used mine on my computer and it's already tied to that one.
By the way, changing from XP to Windows is not considered as updating as it requires a complete replacement of XP and you lose your applications in the process. The applications will have to be reinstalled later using their original installers.
Make sure also you back up all important data that you can't afford to lose. In some cases, data will be moved to a WINDOWS.OLD folder if you don't format the hard drive nor change the partitions but you shouldn't just rely on that nor take a risk. Make external backups or copy them to a different partition in the hard drive.