I have heard that you can use a USB drive to install Windows 7 for a while, but I have not tried it myself. I got a chance to do it yesterday, and I was surprised how easy it is. There are several guides when you google it. The one I used to prepare my external USB drive is actually a Vista installation guide.
There is no additional software to download. What you use is the built-in partition tool for Windows: DISKPART. It’s advised that you prepare the USB drive on Vista or Windows 7, because the command LIST DISK doesn’t show USB disks on Windows XP. Once you use DISKPART to make the USB drive bootable, copy everything from the Windows 7 installation DVD to the USB drive and that’s it. I used the USB drive on a Dimension 3100 and the installation took less than 20 minutes. That’s quite impressive for an old machine.