1. Use Unetbootin
Start unetbootin, select disk image and choose the file XBMCLive.ISO.
2. Use grub4dos
By using grub4dos you will keep the original look&feel of the Live CD, as well as have all the features of grub.
a. Install grub4dos on the flash disk; I have found a nice tutorial for that; the relevant part is section #1.
b. Copy all the files from the CD to the flash disk.
- Creating the permanent storage file
Unless you create a "permanent storage file" all the changes applied at runtime will be lost.
The neat utility TopoResize can be used to create the "permanent storage file".
Grab the tool and create an ext3-formatted file called "live-rw" (no quotes), and place it in the root of the flash disk.
Under linux you would perform a similar task by means of:
sudo mount -t vfat /dev/sda1 /mnt
dd if=/dev/zero of=/mnt/live-rw bs=1M count=600
mkfs.ext3 -F /mnt/live-rw
(replacing 600 with your preferred size in MB).