Hmm... I'm afraid you got me wrong. It IS possible to install from a USB stick if you have the right data format. ISOs are not the right data format -- they are "literal images" of CDs or DVDs, so they only work if burned to CDs and DVDs. On the other hand, there is no such standard for USB sticks that would be analogous to the ISO standard for optical media. A USB stick is usually just a storage device to your computer, very similar to a hard disk. Now, would you copy an ISO to your hard disk and expect it to boot? Well, it wouldn't.
That said, there ARE distros you can install from USB sticks, such as Mandriva and Damn Small, but those are not ISOs. They are actually complete bootable installed systems, just as the one you're reading this thread from. And they're not meant for installing, really, they're meant to be used out-of-the box. You boot the USB key and get a working desktop environment, all this without touching the hard drive.
As for your initial project, I have good news: although simply "copying" an ISO to a USB stick won't do, the following procedure WILL: