The main issue here is that in order to install win 7, you will be basically wiping out most of your existing OS. Makes it hard to use anything other than a drive.
As far as the download, you need a wired connection for anything large, wireless connections require fairly frequent refreshing, and that is likely why you are getting dropped.
Maybe have a friend download the executable with a wired connection and drop it onto a memory stick for you to use? 4gb sticks are not that expensive. Would be my first choice, other than using an optical drive.
There are utilities you can use to mount an ISO on a virtual drive. Not that hard, and much cheaper *free* than buying an optical drive, which netbooks tend to lack. Quick google brings this:
http://askville.amazon.com/free-iso-...uestId=7659963
I've used daemon tools in the past with no issues.