While I'm not an SCCM guru, I know we had trouble with this aspect in the past.
On our current 2007 setup, the first step of the OS task sequence uses the built in task: Disk -> Format and Partition Disk.
Disk 0
Standard MBR
100% Primary partition & quick format to NTFS.
We use this on new builds and will also work on moving a machine from XP with SEE to Win7. That task wipes the existing partition clean. We don't back up user data, so if you're doing this in the middle of a OS task sequence load, it may be due to the way SCCM stages the PE boot wim. I think you can choose to stage in memory rather than on disk.