I can report that the behavior is different. I am not getting dumped to the "Must be MBR and FAT formatted" message during image file selection.
Testing Sandisk 2G U3 (with U3 removed): Always reports "Unable to read". I thought it might have been the 2' usb extension I have been using but removing it made no difference. Log attached.
Testing Win Tech 8G: Now always mounts and doesn't seem to get confused during image selection (that is when I would be dumped to the MBR/FAT message previously) But I was unable to write the (previous) log to this USB device. As I have no troubles running from image files on CF, I figured I'd document the issues I am seeing when trying to boot GS/OS from the USB. Unfortunately it fails unreliably (meaning, different each time) but it always fails - either as the drivers are loaded or just after they all complete. My initial theory was a write to the USB but since it doesn't seem to fail in the same place with the same error message, I don't believe that anymore. I did however grab what was left in the log for posting here to see if it gives any help.
My testing of 6 USB drives 2g-8g in size, various manufacturers both known and unknown seems to show that I only get "Unable to Read" or a device that looks like it will work but doesn't seem to be able to write to the USB.
A2FS1 booted and ran as a dos disk, but couldn't remember how to tell it to try to write to the disk.
Wizardry 1 boots, but crashes when leaving the intro - I'm not sure if it's CFFA or GS and Wizardry although the image does run fine in a GS emulator. My 5.25" drive is packed away at the moment.
If there is something else you'd like me to try, please let me know.
Rob