Yes, it is true that you can damage your flash memory drive with a "surprise removal of hardware," as Microsoft calls it. It's better to be safe than sorry and click through the Safely Remove Hardware applet to stop the device before removing it.

However, most times, you won't experience any difficulty if you just yank your USB drive from the PC. The problems associated with surprise removal are more of an issue with older versions of Windows than with the more recent XP. That said, I had an old USB drive that I connected to and removed from my laptop (running XP) hundreds of times without incident--and without bothering with the Safely Remove Hardware routine. Then one day, I pulled it out, and that was it--dead. So now I (usually) use the Safely Remove Hardware app. Learned my lesson.

Check out this page on Microsoft's site for more information about XP and surprise removal.