Cannot activate Windows 7

You may have bigger issues if you're BSODing. Did you do a full format instead of a quick format? Is the PC older that you're using? If the PC isn't very old, you should not be see any BSOD unless files got corrupted during an install. Which can happen. I would re-burn a new copy of XP as the disc could be bad which could lead to file corruption. Before re-burning you might need to get a new copy of XP as the downloaded files could have gotten corrupted.

If activating is the issue, all you need to do is call the number on the activation window and it should put you to an automated service, read your cd key, and when it asks how many times this has been installed, say 0-1 times. It should then proceed to read you an activation code. Fill in the boxes, and BAM! Activated.

But if it's not even letting you upgrade at all, then I would do what Dorosh suggested.
-Insert a Windows Vista/XP (32 or 64-bit, depending on what your key is for).
-Boot from CD.
-When you get to the window where it shows your disk partitions, delete them all.
-When that finishes, click on format and choose FULL (SLOW), the quick format has a chance to create issues later on.
-When the formatting is complete, go to the unallocated space and click "New" or "Create New Partition"
-Enter the Space desired (if you want multiple partitions) or just hit enter.
-Then hit install with the newly created partition selected.

At this point you will be able to sit back an relax for a few minutes while your OS installs.

-Once it has finished doing all of its restarts and you're at the login screen, log-in, enter your upgrade disk or USB and shut down.
-When you turn on your computer, boot from CD again. If you're using an USB, hit F8 or what ever your mobo's boot selection hotkey is and then select your USB.
-Proceed to the windows 7 install, remember to hit UPGRADE.
-If it gives you the same error, then there is something wrong with your bootable device, whether it be USB or DVD. You will have to download a Retail Windows 7 Upgrade ISO(No Cracked Stuff) and try again.
-If you manage to enter your key and install it, it may give you an activation message still. That's when you do what I said at the top of this post.

*NOTE* An upgrade key that is not paired with the disk it came with will give you that message as well. You have to find out when your key was issued, ex. Before Service Pack 1 or after, and download that specific version of the upgrade disk.

Hope this helps! If you are still unclear, or feel like I may have miss-interpreted your issue, let me know!

Ohhhh. So it's doing that while "loading windows" from the bootable disc? Yeah the disk is bad. You need a fresh copy. I've seen this before after using the same burned copy for many years - burned disc's don't last forever. Also, if it's new, you need to re-download an xp copy and burn it at a slower speed to avoid file corruption.
nubbsauce gave some good directions if you can get a disc to work.

Glad to help! You have no idea how many times I've called that hotline to receive a new activation key haha.