You can put 4 primary partitions, or 3 primary and one extended partition on a drive. The extended partition can contain several logical partitions.
I do not suggest installing an OS in a logical partition, but it can be done as long as there is a primary partition to hold the boot files.
Basically, move the data out of the second partition. Then boot to the install DVD, as mentioned and install to the second partition. You do not have to use the second partition, but keep in mind if you wanted to remove one of the OS installs later, which one might it be.
Since you have not mentioned what type of Win 7 install disc you have, I will not attempt to address the upgrade vs. full version DVDs and activation.