dlavigne's method is the method that I use as well. I make sure that the USB stick in question is completley blank by running Activ@ KillDisk on the USB drive and then I use win32DiskImager to place the .xz onto the USB drive.
when i boot the computer windows starts and i have the BIOS set to boot from USB hard drive
Is this a machine that was made by Dell. Some of their BIOSes have the ability of completely removing devices from the bott sequence, but you may not realize that is what's going on. On the Optiplex that I use as an offsite if there is no number next to the entry, no matter it's position in the list it will not boot. Try seeing if this is the case. If it's not perhaps try disconnected the hard drive that you have Windows installed on and see if it will boot for you.
When i look at the "properties" of the flash drive after installing the .img file the flash drive is empty with nothing on it. Any assistance is greatly appreciated.
Yes, that is actually expected behaviour if you are viewing the drive's properties in Windows. The partitions that FreeNAS makes on the USB stick when installed to the drive are not recognizeable by Windows so you simply will not see them and you will only see the space on the drive that was not taken up by a FreeNAS partition.