From http://www.experts-exchange.com/Operating_Systems/WinXP/Q_21274499.html
Recommendations for Booting Windows from USB Storage Devices
The USB Mass Storage Working Group is preparing a specification on booting USB devices to enable booting from USB within the industry. Boot from USB has become a highly requested feature. Both USB flash drive (UFD) and USB CD-ROM drives are in a position to pave the way of new booting features on USB. Enabling users to boot from UFD and USB CD-ROM requires industry-wide cooperation to ensure good user experiences with these devices.
The most interesting applications for booting from a USB device focus on operating system deployment, system recovery, and system maintenance. Key scenarios, listed below, are explored later in this document:
• Operating system installation/deployment scenario
• Floppy disk drive replacement
• System diagnostics tools
• Disk duplication/manipulation (for example, partitioning and formatting utilities)
Current versions of Windows should not be installed to USB hard disk drives because Windows does not support USB hard disk drives as the primary boot device. This paper introduces the expected industry participation related to the following:
More detail here from the source link:
http://www.microsoft.com/whdc/device/storage/usb-boot.mspx