Bootable Windows 7 USB/DVD
6GB + pen drive (8GB recommended)
1. Insert your USB drive and backup all your data.
2. Next, download portable Virtual Box
(sorry, I couldn’t find portable Virtual PC 2007) and extract the zip file contents to your USB flash drive.
3. Open your USB drive, go to portable VirtualBox folder and run portable VirtualBox file.
4. Follow the on screen procedure to create a virtual drive.
5. Once you have virtual drive, you can easily install Windows 7 VirtualBox.
6. After installing Windows 7 on the portable VirtualBox, safely remove your flash drive.
7. Plug-in your USB drive to any Windows system and start using Windows 7 just like a live Cd/dvd.
Note that I have not written each and every step as it's a long tutorial which includes creating virtual drive and installing Windows 7 on virtual drive. You can visit my site to get the detailed procedure.
You can also use this method to carry Windows Vista and XP on your USB.
Source: Into Windows