Windows 7 gives us possibility to install itself from USB drive (yes, you can do it with Windows Vista also). This is, at least in my eyes, great option since USB is much faster and comfortable option to work with. It is much easier to take USB than to burn DVD each time I need to install Windows on some computer.
Procedure to make USB proper boot drive is done with DISKPART utility.
DISKPART> LIST DISK
Disk ### Status Size Free Dyn Gpt
-------- ---------- ------- ------- --- ---
Disk 0 Online 233 GB 0 B
Disk 1 Online 7648 MB 0 B
DISKPART> SELECT DISK 1
Disk 1 is now the selected disk.
DiskPart succeeded in cleaning the disk.
DISKPART> CREATE PARTITION PRIMARY
DiskPart succeeded in creating the specified partition.
DISKPART> SELECT PARTITION 1
Partition 1 is now the selected partition.
DISKPART> FORMAT FS=FAT32 QUICK
100 percent completed
DiskPart successfully formatted the volume.
DiskPart marked the current partition as active.
Please take great care which disk you select (my USB is marked red). If you select wrong one, you WILL lose your data.
If format gives you error that file system is unsuitable for formatting just unplug USB and repeat whole procedure. For some reason that solves all formatting problems. You can also format it from Explorer window and continue with next diskpart command if that is more convenient.
After everything is done, mount/insert Windows 7 (or Vista) installation DVD. Notice which drive letter is it (mine is F:) and which drive letter is your USB (mine is W:). Then copy all files from one to another using xcopy:
> XCOPY F:*.* /e /f W:\
874 File(s) copied
After everything is copied, your drive is ready.
If booting does not work, be sure to enable Legacy USB support in BIOS. It worked for me.