VMWare will boot the ISO and it will program the USB Flash drive as you would expect from a physical machine. That is provided your VMWare installation is properly configured. I use it often for the very reason fat outlined above.
All you have to do is have a virtual machine that includes a CD-ROM, USB and 128M or so of ram. Set the VM BIOS to boot from the CD and point the CD device to the ISO. That will take care of the booting part.
Now here is the catch - The virtual machine will capture the USB device only when the virtual machine is turned on so you'll have to boot without the USB first. While the VM is on, plug the USB device. You should see the USB device icon in the bottom right of the VM window. At that time use CTRL-ALT-INSERT to reboot the VM without shutting it down. On reboot, the USB device should be detected and you’ll be able to take care of business as usual.
Hope that helps
