I am in no way a Mac Expert, but which OS are you installing? For OS X (Panther), you can go to the Disk Utility program. Its under the file menu I think. From there you can partition and format your harddrive. Once that is done, close the disk utility and return to the installation screen.
If I remember correctly, setup will also prompt you for which type of installation you want to do. You can choose an upgrade with current settings, a fresh install with a backup of your old os, or a complete format/reinstall.