Perform Your XP-to-Windows 7 Upgrade on a USB Drive
While news reports are circulating today that Microsoft may be building a version of Windows 7 distributed on a thumb drive, the bigger news for enterprises is that Microsoft is releasing a tool that let's you roll your own and that it supports XP-to-Windows 7 migration.
By using the Microsoft Deployment Toolkit (MDT) 2010 and the User State Migration Tool (USMT), you can create a USB drive that will install Windows7 while migrating all the user data from an XP or Vista box. The video embedded below (which came from Microsoft and requires Silverlight) features Jeremy Chapman, product manager showing how to do so. (If you don't have Silverlight, you can catch the video on TechNet, using other video file formats.)