So you want to "install Windows 7 from a USB Flash/Thumb drive"? Your subject sounded kind of like you wanted to run Windows off the thumb drive directly, not install from it. There are some tutorials/walk-throughs online that tell you how to do this. Basically, you'll need to put the files that would normally go on a DVD onto your thumb drive, and it needs to be bootable. Then your system BIOS settings will have to be set in such a way so as to allow you to boot from USB - which specific USB setting works for your system will depend on your system.
Let me Google that for you.
Any OS install I've ever seen, at least for the past several years, has given the options for formatting a hard drive before install. Yes, Windows 7 does include this during setup, and it's actually easier to work with than XP.
My personal suggestion is that unless you need to keep a partition or two on the drive for some reason, is to select "Advanced" options when you get to it, then for your drive options, delete any existing partitions, and recreate whatever you want to have with your new install. Then make sure you've selected/highlighted the partition you want to install Windows on, and click "Next" or "OK", I forget what the "go" button is there. Next, just sit and watch it work, or take a break, get something to eat/drink, take a walk, whatever. If you end up needing to install any drivers for your SATA hard drive or RAID array initially (not all that common any more), you can also add those via a USB drive if you so choose. It'll be pretty obvious if you need to add drivers, b/c Windows setup will basically stop/pause, asking you for drivers, giving you options to browse for them. With Windows 7, you don't have to do the F6 song and dance of hitting your button just in time... it figures it out on its own.
Well, give it a go, let us know what the outcome... any snags, success, whatever.