Hi,
First up, do a repair install with you XP OS Cd and that will get rid of SP3 and all updates since your OS Cd was made. That should get your PC running again.
You can install Windows 7 to the new HD and then, with your old drive as the slave, copy any information you wanted across to your new drive then format your old drive.
You can get to the recovery console from your OS CD.
You have several ways you can go, you pick which one you want.
If you need help to do any of the options outlined, search the net for instructions.
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Posting Virtuoso
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since Apr 2008