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I am looking to format my computer and reinstall Windows 7 - I have the Windows 7 ISO file but no USB flash drive. I do have a terabyte hard drive but I don't want to wipe the contents.

Is it possible to partition a part of it then place the ISO on it?

If so what tools do I need and what should I look out for?

I am currently on Windows XP machine. External HD is Seagate 1TB

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How about just burning the ISO to a real DVD? – cybernard Apr 22 '13 at 3:47
That requires an optical drive. The OP did not state that he had one. – Hennes Apr 22 '13 at 6:40

This is what I ended up using:

Windows Partition Wizard to create a 10 GB partition on my external USB HD, then burned the ISO to the newly created partition.

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