"This room is occupied."

I'd say 'Sorry! This one's taken'.

'This room is occupied' is a very formal way of talking. I think it would be more natural to say, 'Sorry, I'm in here.' or perhaps, 'Excuse me, this room's already taken'.

I agree with occupied. Most people rarely use the word occupied, but it's more common in reference to dressing rooms and bathrooms.

oh sorry I will find another one for you