As Keltari said, ReadyBoost leverages the SuperFetch technology to cache files and improve performance. SuperFetch by itself analyzes usage patterns and caches copies of your frequently used executables (and libraries) into RAM for quicker access than reading them from the hard drive - this works because RAM is a LOT faster than a hard drive. ReadyBoost analyzes usage patterns and stores some frequently used files (not just executables and libraries) on your ReadyBoost flash drive (and not in RAM). ReadyBoost works because USB Flash memory is a lot faster than a hard drive for certain kinds of operations.
Hard disk drives work by storing data on a hard (versus a floppy) spinning magnetic disk called a platter, and reading or writing that data using a little magnetic needle that sits on an arm that swings over the top of the disk. If the data you need to read is all in a row, known as sequential data, then your hard disk can read it fairly quickly - usually between 60 and 100 Megabytes per second. But if the data is not stored sequentially, the read arm has to move back and forth a lot before it can even start to read a new chunk of data - this is called latency, and it slows things down big time. An average hard drive today will probably read around 1.5 Megabytes per second if the data is scattered over the platter randomly.
Because random reads are so slow on a hard drive, and flash memory is incredibly good at random reads, storing a cache on a USB flash drive can significantly improve performance over an ordinary hard drive, for random reads. As I stated in my comments earlier, a good USB 2.0 flash drive can max out your USB bus at 480 megabits (60 megabytes) per second. That's a bit better than 1.5 ;)
There are some caveats.
The faster a hard disk drive's platter spins, the lower your latency and the faster your read rates. The standard for desktop drives right now is 7200 RPM. High performance datacenter storage drives spin as fast as 15,000 RPM.
Not all USB flash drives are created equal. You can use the built-in Windows command
winsat to gauge your flash drive's performance and compare it to your hard drive.
Your page file is dedicated hard disk space which Windows manages fairly well. Unless you really messed up your Windows during installation, all of the data in your page file is going to be sequential and thus will not benefit from ReadyBoost, so ReadyBoost won't even consider caching page file data.
ReadyBoost only writes to or reads from your ReadyBoost drive when your computer will benefit from it. As Keltari noted in his answer, higher performance systems will use ReadyBoost very little. Low performing systems, like an older laptop, will use your ReadyBoost drive quite a bit - but it should still last you 10 years or more, which is longer than the life of your old laptop ;)
ReadyBoost is not affected by and has no affect on your system's RAM. The myriad nonsense you see around the internet about it benefiting computers with low memory is pretty much bogus - ReadyBoost simply doesn't work that way; that's what your page file is for.
If you have an SSD or a hybrid HDD, ReadyBoost will be completely useless to you, since USB flash memory is so much slower than the flash memory on your SSD or hybrid HDD. As of this writing, there is no way I've found to configure ReadyBoost, i.e. to force it to cache data from a secondary hard disk drive.
Note: To compare performance between your hard drive (c:) and your USB flash drive (e:), to determine if you will benefit from ReadyBoost, you can run these commands at an elevated command prompt:
winsat disk -read -ran -ransize 40960 -drive c:
winsat disk -read -ran -ransize 40960 -drive e: