There are lot of methods to make live win7, here is the easiest method, which deos not require AIK (Automated Installation Kit).
you need:
1- Win7 ISO or DVD
2- Make_PE3
install/extract "Make_PE3" to "C:\", ("C:\" the directory of installed win7).
open Make_PE3 folder and run "Make_PE3.exe" file.
under "windows 7 source" browse for your win7 DVD or mounted ISO.
now just click on "GO" button and wait a while,
after some minutes it will say for something, ignore it and close the program,
open the "C:\Make_PE3\win7pe_x86" here you will see a ISO file name"7pe_x86_E"
its the "Live Windows 7 ISO" file.
you can make 32 or 64bit live version using above method.
Additionat:
to burn it on CD/DVD use any CD burning utility,
See the attached image.
Note: use MS untouched Windows 7 ISO, modified ISOs may casue problems.