This came up with a colleague when installing 8.5.2 from dvd on an XP machine from a download that I knew to be good. Changing the install settings to use other drives on same machine failed. Plenty of space is available on the drive – more than the install could need.
I have had some strange experiences with IBM Lotus downloads so I ased my colleague to try the extraction i.e let the installer create a folder with the fles to be used for setup – on to an external disk on another machine. This worked and allowed him to install the client successfully when connected to the troublesome machine.
So the moral is – if the Notes install error doesn’t make any sense – get a sanity check elsewhere !! Its probably the installer just messing with you.
Postscript
Found this article which might also help others with Windows 7 specific issue