Using Microsoft's Windows 7 USB DVD Download Tool to create Windows 8.1 Installation using USB Flash Drive from the ISO image doesn't fit even my USB drive is few hundred meg bigger. When I format my "4 GB" flash drive, Windows explorer shows 3.67 GB Free out of 3.72. Even though it looks like it should just fit, it does not.
To solve this problem use this procedure instead of Microsoft's Windows 7 USB DVD Download Tool.
1) Insert a 4GB USB flash drive
2) Mount Windows 8.1 ISO(open with Windows Explorer)
Windows 8.1 should now be the E: drive (if some other drive letter, substitute it below for E:)
3) Run as Administrator a command prompt
4) Launch diskpart.exe and execute the following commands
4.1) DISKPART> list disk(make sure the USB flash is seen as one of the disks) (note: the USB device disk number in the list and substitute the disk number below when necessary)
4.2) DISKPART> select disk 1 (make sure the USB flash disk is selected)
4.3) DISKPART> clean(do not do this unless you are absolutely certain the USB flash disk is correctly selected - all contents of selected disk will be removed)
4.4) DISKPART> create partition primary
4.5) DISKPART> select partition 1
4.6) DISKPART> active
4.7) DISKPART> format fs=fat32 quick(UEFI can only USB boot to FAT32, not NTFS)
4.8) DISKPART> assign(In this example, USB mount point becomes F: when assigned) (if some other drive letter, substitute it below for F:)
4.9) DISKPART> exit
Note: Don't close the command prompt.Need to execute a few more commands.
Where E: is the Windows 8.1 ISO and F: is the 4GB USB flash drive, use driver letter substitutions below if they are different.
5) Update the USB flash drive with BOOTMGR compatible code
5.2) CD \BOOT
5.3) BOOTSECT.EXE /NT60 F:
6) Copy Windows 8.1 ISO contents to the USB flash drive
6.1) xcopy E:\*.* /s/e/f F:\
7) Plug the USB flash drive into target box USB slot and boot the box(BIOS/UEFI settings may need to be adjusted to enable booting from USB)