Normally the Truecrypt Format application needs to verify that you've burned the created rescue disk to a CD/DVD drive, and it won't proceed until it does that.
In order to proceed without burning the rescue disk, you need to start the "Truecrypt Format" with the "/noisocheck" or "/n" flag. After the image is created, you can then save it to any folder on your drive, and later on burn it on a USB-drive, as mention in other posts.
More information: http://www.truecrypt.org/docs/?s=command-line-usage
/noisocheck or /n
Do not verify that
TrueCrypt Rescue Disks are correctly
burned. This can be useful e.g. in
corporate environments where it may be
more convenient to maintain a central
repository of ISO images rather than a
repository of CDs or DVDs. WARNING:
Never attempt to use this option to
facilitate the reuse of a previously
created TrueCrypt Rescue Disk. Note
that every time you encrypt a system
partition/drive, you must create a new
TrueCrypt Rescue Disk even if you use
the same password. A previously
created TrueCrypt Rescue Disk cannot
be reused because it was created for a
different master key.