Update: Microsoft has created the Windows 7 USB/DVD Download tool to make this very easy.
I used this guide as a set of directions
The steps are really longer than necessary. You need to:
1. Get a fast 4GB or larger USB Thumbdrive.
2. run cmd.exe and enter the following commands followed by enter
- list disk
- select disk 1 (select your usb disk which number you have determined in step 2)
- create partition primary
- select partition 1
- format fs=ntfs quick
- bootsect.exe /nt60 F: (where F: is the drive letter of your USB drive as reported by the
assign diskpart command in step 9.)
3. copy the Windows sources from the CD or other source using robocopy
robocopy.exe E:\ F:\ /MIR
where E:\ is the source and F:\ is the destination (thumbdrive)
Configure your PC to boot from the USB drive
This is the tricky part. For most of the machines I've tried the USB Thumbdrive will apppear to the BIOS as any other hard drive. You need to muck with the boot sequence to place the thumbdrive higher in the boot order that the local hard drive.
Note that after you do this you might
want to reset the boot order in order
to ensure that BitLocker doesn't
detect boot changes based on the fact
that the thumdrive is missing if it
was there when you encrypted your