How is it failing?
Can the BIOS see it?
Does the boot loader see it?
Does the kernel start to boot?
Does it have a problem seeing the root disk?
I've never tried to boot via a USB stick, but it's certainly possible. At least according to the disk-encryption howto at tldp.org. If you want, head over to http://www.tldp.org/HOWTO/Disk-Encry...OWTO/x266.html
and make sure you didn't forget anything.
I hope my lack of information helped...