How to merge the E drive with the unallocated drive without loosing data in E.
I would use a GParted live cd. GParted is free and works.
Here is a link to a tutorial for using gparted live cd on windows partitions.
I used this same method on my wife's computer recently to accomplish almost the same thing.
If all you have on partition e: are files you shouldn't have to repair the system when you reboot. If all goes well it should be a quick fix.
To resize the partition, use GParted.
An easy way is to get Ubuntu, put it on a CD or USB pen drive, boot it, and use Partition Editor.
Partition Editor: http://gparted.sourceforge.net/
There is also a GParted live CD you can use: http://gparted.sourceforge.net/livecd.php
AFAIK, you can't. You could do it if the unallocated space were "behind" E (by extending E). Unfortunately you're in the opposite situation. So the only way is to backup E, destroy E, recreate a larger partition, name it E and restore the contents.
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Do Not use Partition Magic.
Do use Partition Wizard.
I've recommended this solution to many Win 7 users.
I've used Parition Wizard to do exactly what you ate trying to do.
Burn the iso to a CD and boot from the CD.
Win win 7 you can burn an iso to cd/dvd by simply clicking on the iso file (as long as you haven't changed the default assignment for iso files).