Sorry, I may have missed a step above. When people say "use the windows 7 disc", what they mean is that you need to boot from the windows 7 disc, rather than running the disc in windows.
If you reboot your computer it should say "Press any key to boot from CD", if you press a key you will boot from the CD instead of the normal windows 7 on your hard drive. If you don't see the prompt, you'll need to enable your disc drive as the first boot device.
To boot from the windows disc, you need to open the BIOS configuration/setup (usually by pressing delete or f1 when the computer first turns on and shows an image on the monitor (before windows starts). From there, look for boot priority somewhere (every bios is different), and move your DVD drive to the top above your hard drive.