It is possible to install Windows Vista or Windows Server 2008 from a bootable USB drive.

To create a bootable usb drive to the following:

Start a command line utility called diskpart. This can be done directly from start/run or from a command prompt. Comments are between {}.

diskpart {This will start diskpart from a command prompt}
list disk {This will list all available disks in the system}
select disk 1 {This will select your usb disk, if it is called 1 in your system}
clean {This will erase ALL information on the currently selected disk}
create partition primary
select partition 1
active
format fs=fat32
assign
exit

When you are finished with diskpart, all you need to do is copy all files from your Windows Vista / Windows Server 2008 installation media to the usb disk.

xcopy d:\*.* /s/e/f e:\

And you are done!