Check out Kurt Shintaku's Blog for an explanation on how to install Windows Vista from a USB 2.0 flash drive.
Here's a snippet:
Why would someone want to install a client OS from a thumb drive instead of a DVDROM or over the network? One reason: Performance. Installing Windows Vista from a high speed USB flash drive is in my experience the easiest & fastest way to complete a Windows Vista install. This is much faster than using a DVD, gigabit ethernet, or possibly even some external USB 2.0 hard drives, due to differences in access speed & transfer rate. To put this into perspective, y'know how installing Windows on a Virtual PC virtual machine from an .ISO CD image is really, really, really fast? Imagine something roughly just as fast, except for doing installations of the OS on to actual workstations.