Word 7? Word 2007?

If I recall correctly, Word 7 is Word 95.
Word 2010 Is Word 14. Word 2007 is Word 12. (Sorry, Microsoft works in mysterious ways.)

This is the save dialog from Word 2007 for a new document.
00 deleteme 1.png

That you have not had a problem because of flash drives (other than this one) means that you have been incredibly lucky! Flash drives work fine, just not with Word! So long as Word has no interaction with the contents of a flash drive, things work well. If you do everything exactly correctly when using flash drive with Word, it works. However people seldom are perfect and when they forget to do things correctly, they lose work, usually important and time-sensitive work.

The dialog above is for a new document being saved for the first time. It is being saved, by default, to the location set in Word Options to save documents. However, if I had opened a different document, in a different location, previously in the same Word session, the save location would be the location for the document that I had opened. Word assumes you want to use your last used location within a Word session. Your dialog may look a bit different in Windows 7, but the location box will still be there.