You WILL have to do a "clean install" or as Windows 7 calls it; a custom install.
You CAN partition your hard drive, but I would only keep the files, movies and songs. You'll have to re-install your games, applications and other programs.
You can use Partition Wizard to do this from a bootable CD. There is a 30MB ISO CD image file at their website you can download and burn to either a CD-RW or CD-R disc. IT'S FREE!
Partition Wizard Bootable CD allows user to boot computer directly into Partition Wizard to manage partitions without any limitations.
Features including Rebuild MBR, Partition Recovery, Move/Resize Partition, Copy Partition, Create Partition, Delete Partition, Format Partition, Convert File System, Hide/Unhide Partition, Explore Partition and much more.
You can use
ImgBurn which is a free IMG burning software or
CDBurnerXP which is also free, but has many more features.
Functions of Partition Wizard Bootable CD
Partition Wizard Bootable CD has the same features as of Partition Wizard Home/Business Edition. Features include: Move/Resize Partition, Copy Partition, Create Partition, Delete Partition, Format Partition, Convert File System, Hide/Unhide Partition, Explore Partition, Partition Recovery, Convert Dynamic Disk to Basic Disk, Rebuild MBR and much more.
System requirement
Partition Wizard Bootable CD support 32/64 bit Windows XP, Vista and Windows 7
Version 4.2.2 has solved the technical limitations of bootable CD. Now you can use this new bootable CD image to boot your PC and manage partitions just like Partition Wizard Windows edition.
How to get Partition Wizard Bootable CD
Download Partition Wizard Bootable CD iso file absolutely FREE from
http://www.partitionwizard.com/download.html. Burn ISO file onto a CD using any CD/DVD Burner software.
If you can afford another hard drive I would get one, it's more convenient to do it that way plus keeping the OS separate from your valued files. Get a 160GB SATA II hard drive an use is for you OS, or whatever size you can afford.