DO NOT MAKE ANY CHANGES to the System Reserved partition, which is the "Active" partition Windows 7 is booting from. It does not have a drive letter.
From what you say, it appears that Windows is booting from one hard drive but has the operating system on the other.
The "Unallocated Space" on Disk 0 doesn't appear as a drive available to you because it hasn't been partitioned, given a drive letter and formatted. If you right click the Unallocated Space in Disk Management is there an option to create a partition?