XP upgrade to W7 No new devices could be found. Error

I am trying to install windows 7 onto an Optiplex 760 with AHCI SATA operation. I am trying to use an external hard drive (it can boot ISO files using a grub loader) with the installation information on it. After I select to install windows 7, It then prompts me for some drivers which I thought were the SATA drivers needed to see the Hard Disk. I found drivers on the dell website that look like they are for the Windows 7 install (Intel Matrix Storage Manager (OS Pre-Install Driver Only) Driver, R235890).

It doesn't seem to be what windows is looking for so it just says "No new devices could be found. Make sure the driver files are correct and located on the driver installation media" and puts me back to the driver screen after a loading period.

The driver I think is correct, and I can even see my internal HD on the list when I hit browse. Why is it not happy? Isn't the purpose of that message to install mass storage drivers or something like that?

As a side note, if I burn the ISO to a DVD and do the install that way the problem is avoided. I just want to know why it's not happy when I load the ISO file with an external HD.

Thanks!

Because Window 7 is VERY finicky when it comes to installation.

A lot of users have to disconnect all their internal hard drives except for the one they're installing the OS to.

Instead of getting frustrated, just burn the ISO image to a DVD at no faster than 8X speed, then proceed with your install.