The svchost.exe error can result when your machine is infected with any of a number of viruses and worms. A quick search at the Symantec security reference site turned up no less than 53 references with some of the current top threats showing svchost symptoms.
So step one should be to make absolutely positive that you are running an anti-virus checking program and that the virus information it has is up to date. Depending on the specific virus you have there may be a removal tool available separately that will fix this one problem and allow you to continue with your upgrade (specifically, the blaster virus seems to be quite prevalent, and Symantec has a removal tool for it
here).
Step one-and-a-half (it's actually equally important as step one) is to make sure your operating system has all of the latest patches applied from Windows Update. These viruses exploit vulnerabilities in the operating system that were patched months ago, so if you got infected then you're not up-to-date.
Try these Microsoft patch KB828028 and KB823980