First do what the message says and check if you have the disk space... How much free space do you have on your hdd you are trying to install to?
After that... You could try re-installing Windows, boot up with the Windows CD(XP) or with the Windows Boot Disk(9x) and reinstall Windows over your current installation.
This is not a format, you wont lose any information.

Maybe tonight we'll fly so far away... We'll be lost before the dawn...