Installation without the disc?

I am still quite puzzled as to how are you supposed to install the Windows 7 OS without an actual CD? I've only done it previously with XP home edition and I had a CD so this is new to me and would appreciate some clarification. If you still do not understand what I mean, I'm confused on how will the OS, during installation, gather the information when there's no CD inside to read from?

My second question would be, which one of the versions (Home, Professional, Ultimate) is the best for GAMING? I have no need for security, but anything that would make my games, internet, etc run smoother would be of use.

Thank you.

Ah, so I wouldn't be unable to install windows 7 without a USB flash drive? Guess I'll just buy an upgrade and order the CD then.

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