Windows – Small Windows 7 on Bootcamp

You should be able to create a new partition within Windows 7, windows can see the whole disk, it can even access the files from you OS X partition using tools such as Paragon HFS+

This adds on to Django's answer, pointing out how to allow the option for revealing "Create a Windows 7 Installation Disk" in Boot Camp Assistant.

I checked the Bootcamp documentation and it says I may have the option to "create a windows installation disk" but I don't have that option (unsure why?)

Because you cannot see this option, it is most likely because your computer is not supported in Boot Camp Assistant.app's Info.plist. However, that can be quickly changed.

1. Open a new Terminal window and run sudo nano /Applications/Utilities/Boot\ Camp\ Assistant.app/Contents/Info.plist

2. Type in your password.

3. Move with the arrow keys down to the bottom where it says:

(I meant to start with " (<) key (>) USBBootSupportedModels (<) /key (/>), but I don't know how to ignore HTML markup here. _{If a moderator or someone who knew how could change this, that would be great.}

<array>
<string>IM130</string>
<string>MM50</string>
<string>MP60</string>
<string>MB80</string>
<string>MBP90</string>
<string>MBA40</string>
</array>

Check for your computer model number in  > About this Mac... > More info... > System Report... in Hardware Overview under Model Identifier. It should be something like

    Model Identifier: iMac10,1

iMac = IM, Mac mini = MM...and your MacBook Air would be MBA. Now, simply take MBA and add it to the numbers after (MacBook Air3,2 to MBA32) without the comma.

Go back to your Terminal prompt and remove the current string part with MBA (you may want to make a note of this somewhere, in case you decide to revert later). Replace it with an identical one that says:

... <string>MBA32</string> ...

(Without the ellipses)

Now save the file by typing Control-O and confirming the WriteOut by pressing the return key (make sure Wrote xx lines appears). Quit and re-open Boot Camp Assistant, and the option should be available!

At this point, you can select your .iso image, as usual (given that you've already converted the .img)