I too have installed Windows 7 with a usb flash drive and loved the speed and ease of use. There are a few small down sides to it. The bottleneck would be bandwidth if you where using USB 1.0 or these other small problems. Drives are writeable meaning things can get writen to the install that shouldn't be there like viruses and malware. The other thing is machines not being able to boot from USB even tho these machine are close to the low end that you wouldn't get the full experince of Windows 7 people still have them out there and use them. I have a few machines that fall into that boat. Then there comes in the USB drive its self, some manufactors use cheap parts making them slow to save on cost and to be able to sell at the lowest price possible so this could cause some problems for some. With prices of Flash drives dropping at a great rate Im sure that you will see Windows 8 on a flash wish it was 7, maybe they will release a tool on the windows 7 disc that creates a USB Boot/Install setup for those who want to use it and see how well people come to the idea of using a USB drive for install.
Others have already talked about it in this post Will Windows 7 be offered on USB drives?