If you've tried creating USB Bootable XP Embedded Images from Vista then chances are you might have run into a couple of issues. The UFDPrep application that ships with Feature Pack 2007 was specifically designed to allow you to prepare USB media from the Windows XP Platform - simply because there was no other way of doing it!
If you wish to prepare your USB media from Vista you can use the built-in (and improved) DISKPART utility to prepare and format your media as follows:
Microsoft DiskPart version 6.0.6000
Copyright (C) 1999-2007 Microsoft Corporation.
On computer: DAVBAKERM5
DISKPART> list disk
Disk ### Status Size Free Dyn Gpt
-------- ---------- ------- ------- --- ---
Disk 0 Online 93 GB 1273 KB
Disk 1 Online 75 GB 1081 KB
Disk 2 Online 1000 MB 0 B
DISKPART> select disk 2
Disk 2 is now the selected disk.
DiskPart succeeded in cleaning the disk.
DISKPART> create partition primary size=512
DiskPart succeeded in creating the specified partition.
DISKPART> format fs=ntfs
100 percent completed
DiskPart successfully formatted the volume.
DiskPart marked the current partition as active.
Obviously you will need to substitute the disk number, size and format with your specific information. The one thing to watch out for is that Vista’s DISKPART stamps the MBR so that it looks for BOOTMGR instead of NTLDR. So in order to boot, you’ll have to rename NTLDR in your XPe image to BOOTMGR.