Try to use WintoFlash to make bootable usb drive. It would directly copy your windows 7 DVD contents into the usb drive. No need to convert it to ISO.
4GB USB drive should be fine as suggested
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Once usb drive is ready, restart your system and go to the Bios and set 1st boot to USB.
Remember to switch back 1st Boot to HDD, after windows 7 installations restarts for the first time. Else windows installations will start again.
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WintoFlash (version 0.5.0000)
http://wintoflash.com/overview/en/