Try these following suggestions:
The error 0x80070005 occurs if the upgrade has no permission to writecertain folder. Try the following steps:
Reset permission
1. Please download the subinacl.msi file from the following link and save the installation patch onto the Desktop:
http://www.microsoft.com/downloads/details.aspx?FamilyID=e8ba3e56-d8fe-4a91-93cf-ed6985e3927b&displaylang=en#AffinityDownloads
2. Please go to the Desktop and double click the downloaded file.
3. Please select the C:WindowsSystem32 folder as the Destination Folder during the installation. Later we will use this tool to reset the permission settings on the current machine.
4. Click the 'Start' Button, in the 'Start Search' bar, type: 'notepad' (without quotes) and press Enter.
5. Copy the following commands and then paste them into the opened Notepad window:
@echo off
subinacl /subkeyreg HKEY_LOCAL_MACHINE /grant=administrators=f
subinacl /subkeyreg HKEY_CURRENT_USER /grant=administrators=f
subinacl /subkeyreg HKEY_CLASSES_ROOT /grant=administrators=f
subinacl /subdirectories %SystemDrive% /grant=administrators=f
subinacl /subkeyreg HKEY_LOCAL_MACHINE /grant=system=f
subinacl /subkeyreg HKEY_CURRENT_USER /grant=system=f
subinacl /subkeyreg HKEY_CLASSES_ROOT /grant=system=f
subinacl /subdirectories %SystemDrive% /grant=system=f
@Echo
@Echo Finished.
@Echo
@pause
6. After pasting the above commands, please close the Notepad window. Choose 'Save' when you are prompted to save the file. Type 'reset.bat' as the file name and choose 'Desktop' from the left panel as the save location.
7. Refer to the Desktop and right click the reset.bat file, then choose 'Run as administrator.'
8. You will see a DOS-like window processing.
NOTE: It may take several minutes, please be patient. When it is finished, you will be prompted with the message: 'Finished, press any key to continue'.
If same thing happens, let's move to the next step.
Run the upgrade by using the Built-in Administrator
1. Click the Start button->All Programs->Accessories.
2. Right click Command Prompt and select 'Run as administrator'.
3. Click Continue when the User Account Control window appears.
4. Copy the following command and press Enter:
net user administrator /active:yes
5. Restart the computer and then log into the computer by this Administrator account.
6. Run windows 7 upgrade.
Error code 0x80070005 usually indicates that you don't have enough privilege or the operation is blocked. As I know, some programs (Boot Camp on Mac PC, etc.) may not be compatible with Windows 7, if you have installed these programs on the computer, you may not be able to perform the upgrade. You need to uninstall these programs before upgrading. Moreover, this kind of issue can be related to UAC, I recommend you toturn off UAC in Windows Vista , if you have installed any security software, try to uninstall the security application as well.
BTW, for your references, I found some similar issues:
Windows was unable to create a required Installation folder. Error Code: 0x80070005
http://social.technet.microsoft.com/Forums/en-US/w7itproinstall/thread/d04e9cf3-3eae-4a1f-a9f8-e2c5ed88d183/
'Unable to create folder' error when trying to install Windows 7
http://social.technet.microsoft.com/Forums/en/w7itproinstall/thread/3621e8cf-b2ce-479b-beac-08acc435a856
Error 0x80070005 when upgrading to windows 7 from vista
http://social.technet.microsoft.com/Forums/en-US/w7itproinstall/thread/08986904-c822-4801-95a5-55ddd5aadcea/
Also see:
http://social.answers.microsoft.com/Forums/en-US/w7install/thread/cb679e27-f2e6-4cd5-b708-a4992cec5a9d
CREDIT: Dale Qiao Microsoft, Moderator and cdobbs Teching It Easy: With Windows ActiveWin Notebooks Microsoft MVP