For starters, recognize that you CANNOT do an "upgrade" from XP to Win 7. In fact you MUST do a completely fresh Install of Win 7, and then copy files over. You are in an ideal situation for this because you have a new hard drive to install to.
As a general principle, it's a good idea when installing an Operating System to disconnect all drives except the one you are installing to. So, disconnect power to your case, open it up and mechanically mount the new 1 TB SATA unit inside. Connect its power supply line and its data cable, plugging the data cable other end into any mobo SATA connector, but maybe prefer the first one usually marked "SATA_0". Also ensure your optical drive is connected. DISconnect your old IDE drive's data and power cables for now. Close up and reconnect the power cord.
OOPS! IF your system was set up with the IDE drive as a Master on the port / cable, and your optical drive as a Slave on that same cable, you really cannot simply disconnect the IDE drive because that port MUST have a Master. So your choice is NOT to disconnect, OR to temporarily change the optical to a Master setting while the IDE HDD is disconnected. You would have to change it back again later when the IDE old drive is re-connected.
When you boot up, go directly into the BIOS Setup screens (usually by holding down the "Del" key as you boot). Look for where the SATA ports are set up. Ensure the port is Enabled. Next to that should be a setting for SATA port mode. You could use IDE (or PATA) Emulation, but with a Win 7 system you are better to choose AHCI (or, if that isn't there, native SATA maybe). Do NOT choose RAID unless your mobo forces you to do that for any unit that is not IDE. Now go to where you set the Boot Priority Sequence. Set it so that the optical drive is tried first, then the SATA new drive, and no other device after that. Save and Exit to finish the boot. Make sure as you do this that your Win 7 Install disk is in the optical drive so it will boot from there and start the Install process.
Run your full installation of Win 7. Unless you want to break up your 1 TB new drive into 2 or more Partitions, ensure it uses all of the available space on the new HDD for one large volume. Tell it to install the NTFS File System unless you really know you need FAT32 for some reason. When it is all done you will need to get the CD that came with your system so you can install all the device drivers for your mobo. Actually, usually much better than that is to install the latest Win 7-compatible device drivers for all those things. For this, you should have checked out what drivers are available and downloaded them to burn on a CD-R BEFORE you started the Install.
After you have Win 7 installed and running properly you can shut down, disconnect power, open the case and re-connect the old IDE drive's power and data cables, close up and boot up again. (Do you need to re-adjust the Master and Slave roles for HDD and optical drives here?) Now you should find that old drive in My Computer as a unit with a new letter name and fully usable. However, you will have a problem with all your application software. Win 7 won't know where any of it is. The best option, although it certainly takes time, is to do a fresh re-installation of all your applications under Win 7 to the new 1 TB drive unit. After you've done that, you then copy all your old user files from the IDE old drive to folders on the new drive. When you're done you should have ALL your old stuff working - it will just all be on the 1 TB C: drive, with older copies on the IDE drive. After a bit of time to be SURE you did not forget to copy something, you can consider wiping the old drive clean and using it for data storage.
I haven't done my XP-to-Win 7 change yet, so I'm not sure if there are tools to simply copy ALL your old apps, data, etc, etc from old drive to new one and get Win 7 to recognize it all. But I know a fresh new install of all the app software is better anyway, so I'll take the time to do that.