I was able to boot Win7 and Windows 2008 r2 installer. WinXP install doesn't work yet (I tried chainloading grub4dos)
/dev/sdb1 -> data partition, iso images (fat32)
/dev/sdb2 -> extended partition
/dev/sdb5 -> grub partition (ext2)
/dev/sdb6 -> win7x86 (ntfs) (copy all data from the install cd)
/dev/sdb7 -> win7x64 (ntfs) (copy all data from the install cd)
/dev/sdb8 -> winxp (fat32) (copy data from a winxp-usb-install-stick, created with WinSetupFromUSB)
/dev/sdb9 -> win2008r2 (copy all data from the install cd)

to boot the windows installer i simply use the following menuentries:
menuentry "Windows 7 (32 Bit)" {
root (hd0,6)
search --no-floppy
chainloader +1
}
menuentry "Windows 7 (64 Bit)" {
root (hd0,7)
search --no-floppy
chainloader +1
}
menuentry "Windows 2008r2" {
root (hd0,9)
search --no-floppy
chainloader +1
}

Great! I guess this proves that Windows (7) does not need to be on a primary partition? What ISO images does sdb1 contain? Anyone relevant to the booting of Windows 7 /2k8r2?

I think there should be two issues to be distinguished.

(1) To Load a MS Windows installer into a USB device so that it can boot by Grub2.

(2) The other issue is after the MS Windows installer has been fired up from the USB device , can it be used to install the MS Windows? The installer can fail later during the installation if booted from a USB partition instead of from a CD/DVD.