Step 1: Format The Drive For Booting
Follow the steps at the command prompt as seen here (making VERY sure to select the proper disk number):
Also, keep in mind that this probably won't work in XP. The diskpart command is available, but when listing the available disks XP does not identify USB flash drives in the list.
Step 2: Copy Vista Install Files To Drive
Now just drag the files from the root of the Vista or Win7 DVD to the root of your USB drive. You can also run the disc image through vLite and slim down and simplify your install process if you want before doing this.
Step 3: Boot From The Drive
The newer the motherboard, the easier this is going to be. Older boards might refuse to do it entirely. Newer boards definitely will, though I found it to be a bit tricky. In the boot order menu, I selected USB Disk in place of the floppy option and put it before the CD-ROM and hard disk options. This didn't work. What I actually had to do was go into the hard drive specific boot priority menu where the actual USB drive is shown and move it up to the top of the order.
The easiest way still, IMO, is to use the boot menu option at the POST screen to just boot from the drive once that way when the install process reboots you don't end up with an install loop.
So why do this? Well, the Vista Home Premium install files are about 2.5GB. So it'll easily fit on a 4GB drive. If you want to get tricky with vLite, I'm sure you could slim it below 2GB fairly easily and shoehorn it onto a 2GB drive. Either way, those size flash drives are a dime a dozen these days. $10 will get you a very nice 4GB and if you get one with good read speeds, it's probably a bit faster than optical media. Besides that, if you like to toy around with vLite and automated installs, it beats burning a new disc every time you change something It also provides the simplest method for installing an OS on a PC without an optical drive (like a netbook).
FYI: I have no idea why, but this does NOT work for me when I format the same way and copy XP to the drive. I'll be working on a similar procedure to install XP from USB next...