Have you managed to resize your partition, or is Windows still playing up? If you're still having problems doing it from within Windows, then you can do it using the Ubuntu installation CD.
Briefly, using the LiveCD part of Ubuntu (the part you were playing around with earlier) you install qtparted - a Linux disk partitioning tool - and use that to resize the partition that Windows is installed on. Then you can run the installer and install Ubuntu to the newly created spare space.
Here are detailed instructions on how to do it.... it's for the 7.04 version of Ubuntu, but it'll be the same steps for 7.10
http://www.howtoadvice.com/ResizePartition/
Briefly, using the LiveCD part of Ubuntu (the part you were playing around with earlier) you install qtparted - a Linux disk partitioning tool - and use that to resize the partition that Windows is installed on. Then you can run the installer and install Ubuntu to the newly created spare space.
Here are detailed instructions on how to do it.... it's for the 7.04 version of Ubuntu, but it'll be the same steps for 7.10
http://www.howtoadvice.com/ResizePartition/