Follow the steps given below to install Windows 7 from USB drive.

Insert your USB thumb drive.

Open command prompt. If you are using vista open it with admin rights.
Type diskpart and press enter.
Type list disk.
You will see all the disks connected to your system. If you dont have any other d
isk than your Hard disk and pen drive then your pen drive will be Disk . You can
guess your pen drive by its size also.
If its disk 1 then type Select disk 1.
Now before moving ahead take backup of your important data from pen drive as we
will have to format the pen drive.
Now go back to CMD and type CLEAN.This will remove partition or volume formattin
g from the current in-focus disk by zeroing sectors
Type CREATE PARTITION PRIMARY and press Enter. This will create a primary partit
ion of length size and a starting address offset on the current drive.
Type SELECT PARTITION 1 and press Enter.
Type ACTIVE. this will mark the currently selected device as active.
Now type FORMAT FS=NTFS and press Enter.This process may take some time. Wait fo
r this process to end.This will format your USB drive.
Type ASSIGN and press Enter. Then type EXIT .
Now insert your Windows 7 DVD in the DVD drive. I will assume that your DVD driv
e is at D and USB drive is G. Look in your MY computer to know the drive letters
for your PC.
If you have iso file of Windows 7 then you can use this trick to use iso file wi
thout burning.
Now open new windows of CMD and navigate to your dvd drive using cmd. If your dr
ive name is d then type D:
Now type CD boot and press enter. Then type bootsect /nt60 H: (H is your usb dri
ve letter).
Now copy all files to your pen drive.
Now the most important step: Reboot your PC and press F2 when the system restart
s. This will take you in to BIOS Menu. Under the advanced bios options set the P
rimary boot device to your Pen drive. Now you are all set to install Windows 7 f
rom USB drive.