To do this I needed to:
- Repartition the USB drive and format it.
- Expand the OS on to the drive.
The OS does, of course, need to be capable of booting from a USB drive and not need any special configuration to do so. It certainly worked Windows Server 2008 R2 without any special steps. (I also booted memtest86+, but it has a utility to set up the USB drive: "Memtest86+ 4.10 USB Installer.exe".)
To repartition you need to create an active partition, using Windows diskpart:
list disk
select disk ‹n›
clean
create partition primary
select partition 1
active
format fs=fat32 quick
assign
exit
Where ‹n› is the number of the USB drive from the previous command (list disk).