You may need to partition the drive image where you plan to do the install. You can do this from the Installer. Under the Installer menu, select disk utilities. If the drive image file shows up in the disk utilities, you can create a partition. After you create the partition, you may see a message that you can't install on the partition. However, if you exit the installer and THEN start up pearpc again, after the install starts the drive should now be available for installation.
In any case, it may be helpful to use the disk utilities to see if the drive shows up and that it is read/write.