Win7 System Reserved Partition

Let the Windows 7 setup proceed to the partition manager. At this point delete all the partitions you need to so that you have one big block of unallocated space. Then press Shift+F10 to open a Command Prompt window. Type diskpart to enter the Diskpart environment.

To list the existing partitions:

list disk - This should show you only one disk (unless you have multiple hard drives)
select disk 0
list partition
create partition primary - This will create a single primary partition with all the unused space
exit - to exit out of diskpart
exit - to exit out of the command window

Now hit Refresh on the Windows 7 Disk partition GUI and the your newly created partition will pop up. Select this partition and proceed with the system install as normal