Welcome to SF! alicedolan
You have a few option as far as which OS or which edition of Windows you can go with. If you want to stay with Windows besides getting familiar with how to create a USB Install Key as pointed to in the guide Thorsen posted you may want to read how to see 7 installed with an upgrade disk.
http://www.sevenforums.com/tutorials/31402-clean-install-upgrade-windows-7-version.html
As for which Linux distro to go with if you decide on the other OS there are other more user friendly distros besides ubuntu which sees a new version every six months or so! Linux Mint or Linut Mint Debian being a little larger in size will include options to install numerous Linux type desktop apps.
As for 7 generally the 7 Home Premium or Basic edition would be the lower cost options as far as which edition to run on a netbook. The Starter edition mainly the stripped down to basics edition. When considering buying a netbook here for a family member if not for my own use I would have likely gone with the Home Premium.
With any Windows installation you follow the onscreen instructions and options. With a usb key you would select the Custom install option and then select the one drive on the netbook itself. With 7 you would use the drive tools option to partition and format the drive during the installation.
With any any Linux distro the home site will have it's own tutorials for installation to follow. With 7 or the upcoming WIndows 8 Release Preview discussed over at the eightforums.com site Windows will include native usb support since any new apps you install may have to go on by way of a usb optical drive if not downloaded from the web.
In general for someone just starting out Windows is the preferred OS to learn since most softwares are written with Windows in mind. And as Thorsen also pointed out there's plenty of Windows users that can help out here at SF and over at eightforums.
