If you do a Custom installation of Windows 7 on your hard drive without formatting the partition you will end up with a directory on your hard drive that contains your previous version of Windows in it. That directory will be labeled Windows.old and is no longer needed once you settle into your new installation of Windows 7,
So if you go into the root directory and try to Right Click and delete that folder your going to get told that it is not possible. However, there is a method to remove that directory and clean up your hard drive of unnecessary items as well and that is the Disk Cleanup Utility that comes with Windows 7.
Here are the instructions from the Windows Help pages:
Open Disk Cleanup by clicking the Start button. In the search box, type Disk Cleanup, and then, in the list of results, click Disk Cleanup.
If you’re prompted to choose a drive, click the drive you just installed Windows on, and then click OK.
In the Disk Cleanup dialog box, on the Disk Cleanup tab, click Clean up system files.
If you’re again prompted to choose a drive, click the drive you just installed Windows on, and then click OK.
Select the Previous Windows installation(s) check box, and any other check boxes for the files you want to delete, and then click OK.
In the message that appears, click Delete Files.
Make sure you have ALL of your data files copied out of the Windows.old directory before you perform this process as there is no going back and retrieving this directory.