Are you booting to a CD? Does that harddrive work in another computer?(maybe the HDD is messed up) OEM should like the retail windows 7 with the install, boot to CD got through the installation. You should have gotten a 64 bit if you want to use over 3 gigs of ram since your vram is 1 gig.

Also doesn't it give you a cd you load before the windows 7 disk to prepare a blank harddrive and then it tells you to install win 7?

But it kinda sounds like a HDD or cd rom problem, just swap em out and make sure they both work.