With Windows 7 SP1, there is an easier way to install Windows 7 to a USB Hard Disk or USB Flash Drive.
This was discovered by cdob at Reboot
It boils down to two registry keys, which i think are present in Windows 8 to enable Windows To Go feature. I guess this feature was present in Windows 7, but was never activated.
reg.exe add HKLM\System\CurrentControlSet\Control /f /v BootDriverFlags /t REG_DWORD /d 0x6
reg.exe add HKLM\System\CurrentControlSet\Control\PnP /f /v PollBootPartitionTimeout /t REG_DWORD /d 15000
So inorder to use these new registry settings and install Windows 7 to a USB Hard Disk or Flash Drive, you can use a Tool called WinNTSetup which I have mentioned here Is there an equivalent to Windows To Go for personal use?
This tool is easy to use and you quickly install Windows 7 your USB Hard Disk. This tool also allows to create VHD (Virtual Hard Disk) on your USB Drive and install Windows 7 to the VHD on the USB Drive.
More information in the below links.