Here's how I got it to boot linux off of a usb stick. I configured my network to allow Xell to load the Gentoo minimal kernel from tftp and formatted a usb stick to look like a cd to the linux kernel. (basically dd if=gentoo-image.iso of=/dev/sda). I imagine one could also partition the usb stick to have a small fat32 partition containing the kernel and have the second partition be the raw cd image (dd if=gentoo-image.iso of=/dev/sda would become dd if=gentoo-image.iso of=/dev/sda2 presuming /dev/sda1 is your fat partition).
Anyway, this is how I managed to boot the gentoo live cd a while ago but the real solution would just be to build a kernel capable of looking for it's rootfs on the usb device so one could have a proper install instead of an emulated livecd.