Here are the steps that i followed to create a bootable USB drive. Also if you have a USB drive that has U3 installed on it you may want to uninstall it prior to continuing. Here are the instructions on how to uninstall U3 http://www.u3.com/uninstall
Format the Flash Drive
Run CMD.EXE and type the following. Note: This set of commands assumes that the USB flash drive is addressed as ”disk 1″. you should double check that by doing a list of the disks (type “list disk”) before cleaning it.
diskpart
select disk 1 (assuming disk 1 was your thumb drive in the above list disk command)
clean
create partition primary
select partition 1
active
format fs=fat32
assign
exit
Copy the Contents of the DVD to the USB Drive
Simply issue the following command to start copying all the content from the Windows 7 DVD to your newly formatted high speed flash drive.
xcopy d:\*.* /s/e/f e:\
And that’s it. Boot up the machine, have it boot off the USB drive, and watch how fast the installation completes.