I realize this post is a couple years old, though I figured it might help anyone trying to do research just as I was while encountering the same problem last night.
To be clear, I was having the same issue when trying to format and reinstall Win 7 Ultimate on the custom machine I built a couple of years ago.
It wouldn't allow me to make any changes to the partition that Windows was installed on. I couldn't format or delete. Literally had no options aside from installing Windows again and having the "old windows" folder created. The issue seemed to be that despite booting from the Win 7 DVD, on some level the partition with Win 7 on it was being accessed and therefore wouldn't allow me to move forward.
I booted from the Win 7 DVD and went into Windows Recovery Mode. Then I opened the cmd prompt. From there I located and deleted the Windows folder within DOS. The directory still existed on the hdd, but it couldn't be seen. Then I was able to dismount and format the drive while still in the command prompt. After that I restarted and reloaded with the Win 7 DVD and I was able to remount the partition and install Win 7.
The only downside to doing it this way was it rearranged the labels of my existing D, E, and F drives. Other than that, it worked perfectly.