Mac OS X Leopard Reinstall Spinning Cursor At "Select A Destination"

My fiancee's macbook froze (spinning cursor). We restarted. Several times it wouldn't restart, but eventually it did (although it took FOREVER to load). Not long after, it froze again.

We booted up with the OS X 10.5.5 installation DVD in the drive, holding "C." It ejected the DVD. Tried again. It loaded. Under disk utility, the drive's S.M.A.R.T. Status is "Verified." We clicked "Repair Disk," but the repair wouldn't run.

Went back to the installation menu, told it to install. When it got to the "Select A Destination" step, there was no drive to select.

We rebooted to the disk, repeated the process, and the next time the drive was visible. However when I selected it I got the "spinning cursor" and it lingered indefinitely, never giving me the option to continue forward.

We rebooted to the disk and repeated the process twice, with the same result.

Eventually I opened up the disk utility and clicked "Verify Disk." I get the error "Filesystem verify or repair failed." My S.M.A.R.T. Status is still "Verified."

What's going on, and how do I fix this?

UPDATE: I have now selected the drive (which, by the way, has a yellow triangle with an exclamation point by it) without getting a spinning cursor. However the "Continue" button is still grayed out.

Do you have a backup ?
If not make a backup first .
And than it is of course you're decision to do it or not erase the disk
And try to reinstall OS X