Hi Brink, and thanks for your reply, after an extensive search in your web site, I found that some had the same problem that I was having, I solved it yesterday, and didn't save the link. But I have the tutorial that helped me.
My laptop had 3 partitions, one for restore, with around 1.5Gb and loads of free space, the other a System Reserved with 100Mb and only a few Kbs left free and the C with around 232Gb with loads of free memory.
In the topic, someone said that I had to expand the System Reserved by shrinking the C partition to the left, and then add it to the System Reserved... the following tutotial helped me to get my head around it: Dual Boot : Create Partitions Using PWBD
Once I added more 100Mb to the System Reserved the Windows 7 installation to the VHD worked just fine.
My goal was to install a clean Windows 7 into a VHD on the top of my existing Windows 7 Ult ... I will use this VHD as my Dev machine to study and mess around ... it took me a while, but I got it working now, thanks to your forum.
Many Thanks again, Dsouza.