|You can't install Windows Vista on to the same partition (C:) which is currently occupied by Windows 7. Unless you're performing an upgrade installation (which you aren't), Windows Vista must be installed on a totally empty partition.|
Therefore, you need to back up your own files first from the C: drive, then boot from the Vista DVD and delete the existing Windows 7 partition.
That volume will then be listed as "unallocated space".
Now select that unallocated space as the target to install Vista on.
Windows Setup will automatically format that volume, then it will start installing Vista on it.