You can read about 7B errors at http://www.aumha.org/a/stop.htm
, left column.
I would try to run the chkdsk /r command on the C: partition...from the Recovery Console.
How to use CHKDSK in the XP Recovery Console - http://pirules3.14.googlepages.com/recovery_console_chkdsk
FWIW: If your system has a more advanced SP (e.g., SP3) than is reflected on the the CD used
when trying to do a repair install of XP (using a MS Genuine XP CD)...it won't happen. The warning that you received re your options is typical of that scenario. If a user persists, the result will be a clean install and (I think) a backup of the current XP install.
That can be easily overcome by updating the XP CD, creating an install CD that reflects the most current SP or whatever it is that you have installed on the system.
Slipstreaming Windows XP To Create a Bootable Windows XP CD or DVD - http://www.bleepingcomputer.com/tutorials/slipstreaming-windows-xp-to-create-bootable-cd/