It would have been nice if you could install Windows 7 from a flash drive. As it turns out, this is pretty much possible. The guys at Into Windows figured it out. With a 4GB boot-able USB Flash Drive and Windows 7 or Vista Installation files, you can get you system up and running with the Windows 7 (or Vista). The following steps lead you the way to do it, and in a jiffy (if your motherboard supports the USB boot features that is). So here are your steps towards creating a boot-able USB Windows 7 from the USB drive:

Put the USB flash drive to the USB port and then move its contents to a safe location on the system. Open the Command Prompt with admin rights (right click on Command Prompt and select “Run as admin’). Get the disk number then and then enter the following commands there

SELECT DISK 1 > CLEAN> CREATE PARTITION PRIMARY> SELECT PARTITION 1> ACTIVE>FORMAT FS=NTFS>ASSIGN>EXIT

Image Source: Into Windows

After these steps you need to insert your Windows 7/Vista DVD into the optical drive and check the DVD Drive letter and USB drive letter. Then open the command prompt again and type in your DVD drive letter followed by CD BOOT (D: CD BOOT where your DVD drive letter is “D”) and then press enter. Now type in the final command,

BOOTSECT.EXE/NT60 H:to update the USB drive with BOOTMGR compatible code. Then copy your Windows 7/Vista DVD contents to the USB flash drive.

Now you need to change the boot priority at the BIOS from the HDD or CD ROM drive to the USB drive.
That’s it. Your USB drive is now all ready to install and run Windows 7 (or Vista) for you.