It appears you have not had a response for 4 days. rest assured this is unusual.
Just a few points. You used the 'restore disk' - was this supplied by a major manufacturer with your PC? Like Dell, HP etc. There are many varieties of restore disk, you must use the one supplied specifically for your PC. You must read the manual as to how to use it, and what it does. Had you done so, you would have discovered yes, of course it destroys all your existing setup.
After the restore, it says disk error cannot start. First off, to run a restore disk, you usually have to change the boot order (in the bios) to put your CD at the top of the boot order. Then when the re-install completes, you have to change the boot order back to boot off the hard drive again.
You may have failed these 'basic knowledge' tests, but if you knew all that, the chances are your HDD is toast (maybe that's why you wanted to restore in the first place?)
As to should you get a 'new' XP or Win7 - depends on the age, condition and spec of the PC I see you have 3Gb which would be fine for XP. The experience with installing Win7 instead could be variable. One step you could take is look on the PC m/f web pages to ensure all Win7 drivers are available. If home-buiilt, check the motherboard pages.
Also bear in mind the cost of a Win7 install DVD for home-builders is, in a word, extortion, but a new PC absorbs this cost entirely into the retail price.
