Over at eHomeUpgrade, Will Wagner indulges in a little science project: How-To: Boot Windows XP Off a Compact Flash Card.
This article describes how I was able to get BeyondTV Link, a .Net application, running Windows XP Home using an inexpensive compact flash card. As a disclaimer, please note that your mileage may vary when doing this procedure so please don’t blame me if things go badly, your spouse leaves you, and/or your dog bites you as a result of this article.
He started out trying to boot from a USB flash drive and decided it couldn’t be done. Sounds like a challenge. Anyone want to try?
Ed Bott 
I too wasn’t able to get my PC, and another PC to boot off a SanDisk 256MB USB 2.0 Cruzer Micro Stylish Flash Drive, even after following these instrctions. http://www.aaltonen.us/archive/2004/03/01/tip-boot-from-usb-key-addendum/
both on a VIA KT3 Ultra 2 motherboard (with latest BIOS) or a ECS K7S5A rev1.0 (latest BIOS) motherboard, both set in the BIOS to boot off a USB Key..