usb flash drive not a valid backup location for system image

While most of what you write is correct, the comments on the exact copy, the RAW, and the copying of empty space are all incorrect.   System Image creation does not copy the empty space.   (If you need proof of that, simply realize that when copying a 128Gb, 256Gb, 320Gb brand new disk-drive system, even with your new S/W installed,  you only have in the neighborhood of 22Gb to 48Gb of actual space consumed on your 320Gb HDD (in a laptop).  If you create a system image on an optical disk (say, a Blue Ray), you can do it on 1 or 2 disks.  (Blue Ray's, hold 25Gb, so that 25Gb in one disk, or 50Gb  in two, for a 320Gb volume. ...)   System Image does NOT copy the blank empty space, if it was copying the blank space, you would need 320Gb of space, and you do not on optical or HDD (non-flash) media.

The arbitrary limit from Microsoft on the usage of "flash" drives is just stupidity in a limit, for no reason.  When Win7 came out (2008), and leading up to that with Release candidates, 1Gb,2Gb, and 4Gb drives were the typical sizes.   Now 128Gbyte flash sticks are common and cheap enough, and laptops are now common without optical drives, and people are still using Win 7 (or grudgingly 8.1).

When Windows 8.1 came out, the fact that Microsoft didn't fix this issue is unforgivable.  Just arrogant, lazy, and stupid as a company, focusing on unimportant things.   (Or perhaps trying to fix the disaster that even Win8.1 is in terms of the Metro GUI- junk, and UGLY.   That they didn't fix Win7 with an update on the trivial stupid limit removal is also unforgivable.  Just typical lazy-**** Microsoft.

You would think that basic built-in image backup is something that Microsoft would make work, especially given how often Microsoft Update fouls up in some catastrophic manner and renders a system completely non-bootable.  (Add to that how often boot-failures can happen because of 3rd party drivers, and Microsoft should understand how critical System Image creation is.)   And how image creation on a flash drive is a basic no-brainer. 

But clearly, the company is just broken.

$100 says it is still as crappy in Windows 10 as it was in 7 and 8.1.

This is just further proof of how ridiculous Windows 8 is and how controlling Microsoft are becoming. Obviously Microsoft now wants to force everyone to use Cloud storage and has messed with things (I'm not technical) so that you can't use a USB for backups. From what I've read about the lack of privacy issues with Windows 10, and now the fact that I can't back up my computer as a precaution, I will not be taking up my option to upgrade. Microsoft seem to be determined these days to put people's backs up. Maybe they are subconsciously trying to bring about their own downfall? They are certainly going the right way about it.

How do you create a directory on the USB connected drive, and will this process also work with a WD My Passport USB connected drive?

What does sharing on a network have to do with creating a backup recovery image?