Hey, we've all started somewhere. You'll figure it out, just stay with it.
He's asking how you want to store linux.
Since you only have one hard drive you have a couple of options:
1. Run from the Live CD completely and just boot linux from your flash drive to browse the web, whatever, and boot windows 7 from your computers hard drive
2. You can instal linux to another flash drive and boot from that (you mentioned you only have one, so this probably isn't an option)
3. Install linux to disk and use the bootloader to decide what OS you want to boot to
Option one requires no change and Spearmint2 seems to have some guides for installing and running from a flash drive, so I'll describe option 3. If anyone notices anything wrong, call me on it. I'm still in a learning process too.
Your buddy is mentioning installing Windows first because Windows used to have a really nasty habit of killing the bootloader in the Master Boot Record. It used to be safer to install Windows first then install linux.
You mention that you have the following: 1 Computer Hard drive, 1 thumb drive with linux on it, and one Windows 7 install disk.
If you're using the USB stick with linux already, I dont really see how you would use data.
If you have it installed to the hard drive, you'll need to make room for the new Windows install. When you installed linux to the hard drive, you probably told it "Use the whole thing; be as greedy as you want linux!", but now you need to make room for old Windows. The way you do this is by "Partitioning" the drive into seperate spaces to hold stuff. You'll take away space from linux, and give it to your new Windows buddy. This is done using Gparted and resizing as trapperjohn mentioned (a quick google search turned up this:http://www.howtogeek.com/howto/windows-vista/using-gparted-to-resize-your-windows-vista-partition/
Once you've done that you can install Windows to it's own partition and leave linux in its current partition. One issue now remains. The bootloader.
The Bootloader helps the computer... boot the OS and is required and the primary bootloader is stored in the MBR. The bootloader is what prompts you for what you want to boot at any time. Windows 7 has its own bootloader, and linux has several(only one of which is ever installed at a time). LILO and GRUB are the most widely used. GRUB is generally pretty good about finding Windows and adding it to the list of bootable OSes, you can even tell linux NOT to install a bootloader, or not install the bootloader into the MBR (this is how I am dual booting). Windows, however, will be so excited to be installed, that it will install straight to the MBR, and will give linux no love and forget how to boot it (where the critical file to start the booting process is located), and will boot straight to Windows 7.
So at this point you have two options:
1. Reinstall GRUB into the MBR, and grub will find Windows and your Linux install (hooray!)
2. Download a program called EasyBCD (it's free for private use), and you can tell it (and in some instances it will find them itself) where your linux install is and it will add that entry into the Windows 7 bootloader
I hope this helped make a little more sense on what's going on.
The bottom line: You need a bootloader to load the OS. Its a matter of using GRUB/LILO or the Windows 7 bootloader.
Fake Edit: nerdtron beat me to a post, but I'll post it anyways incase there is any information of value.