I found the ORIGINAL OS disk and this time it gave me the option of pressing "R" to start a fresh install. I went through the whole windows setup and its all working. My concern is that it did not do this when I put a different XP CD in or a NEW Windows 7 disc. Any ideas out there?
My next step is to take this HDD out and install a 320GB that I have and install W7 on there. Hope it works.