• First, you’ll need the DiskPart utility on the system you will use to prep the thumb drive. This is a free disk partitioning utility that is likely already installed on your Windows system. If not, you can download DiskPart here.
• Launch the DiskPart utility by typing diskpart at the Start Menu.
• Then run the list disk command to check the status of your drive.
• Now run select disk 1 where the “1″ is actually the corresponding number of your USB drive.
• Run clean.
• Once the thumb drive is clean, you can run create partition primary.
• Now make the partition active by entering active
• Then you need to set up the file system as Fat32 by running format fs=fat32 quick (quick, of course, specifies that you want to perform a quick format to speed up the process).
• Entering the assign command gives the USB drive a drive letter, making it easy to access from Windows Explorer
• Then you can copy everything from the Windows 7 installation DVD onto the USB key (a simple drag and drop will do).
• Now you can insert the thumb drive into the system you want to install Windows 7 onto and boot the system. The installation will now proceed as usual—but faster.

Sources: Windows 7 News