Well that's probably because the drive has still data on it. Delete the partition and format it then, do a backup of your data before you do that. Then the installation should run fine. Some one correct me if I am wrong.
Not that its relevant(have 23gigs left on desired drive) but i did format using format command in setup page.
What about creating a new partition from the left free space and install it in there, maybe that'll work. EDIT: Back up all your data on the desired drive where you want to install. Run setup again and kill the partition and use the advanced tab to reallocate space and format the drive. Then install it to there, the installation will work then. Windows 7 uses to build a system restore drive ( hidden ) about 100MB that maybe prevents it from installing when the drive is not formatted.