Yes, I know what the problem is
To use an upgrade version there must be an existing Windows install. The installer checks for this *before* the stage where you partition/ format your drives.
Easy way to get around this...
1. install win7 where you want it (create partitions yourself manually)
2. use a blank key when it asks (you enter "evaluation period" of 30 days).
3. reinstall win7 *without* formatting/ deleting your old win7 partition outside the installer.
4. format your partition with the win7 installer (by this time win7 installer has validated that you are performing an upgrade
)
5. use your upgrade product key
6. ???
7. profit.
[edit: you should be able to install to any partition using this method, but there are reports of some people having to install to the first partition on the disk; windows historically has always wanted to be installed to the first partition]
