Personally I've tried using this guide EEEguides.com: Install Windows XP on the Asus Eee PC and it works.
It works exactly the same as a CD except that it's faster. (at least from what I noticed). But you have to have a motherboard that supports booting from the USB of course. But you'd have to have a pretty damn old system if it doesn't support that.Never liked the idea for installing OS via usb devices, best to burn it into a disc media format or mount it.