Issue 21 of Full Circle Magazine tells you how to prepare the USB stick from an
ISO file. Issue 22 has an example of doing an installation from USB.

If you want to create an ISO which matches what you have installed on a desktop
system, remastersys will do the job.

I use unetbootin which is in the repositories. Once installed you need to
insert the usb stick before opening the application or it won't detect the
stick. Then you can either locate an iso on your drive or it will download
one for you. Once it is finished writing to the stick, you will have a
bootable Linux distro which is identical to the CD. It will still need to be
installed to a drive, stick or memory card afterwards just as if it was on a
CD.

To use it you need to set your BIOS to boot from USB. Most netbooks do this
anyway. When it boots you will need either another usb stick, SSD or SD card
to put the distro on (8GBs or larger). This will create a distro that you
can boot and make changes to. It works with most but not all distros.

You will have to write grub to the usb stick, SSD or memeory card where it
is installed and will likely have to manually edit grub afterwards.

There is an interesting option on the latest version, 9.04 (Jaunty), in
the System/Administration menu, if I remember, on the Live CD to create
a bootable USB version of Ubuntu. Works fine. I carry one when I'm
traveling, in case I want to use Ubuntu on someone else's Windoze
machine. If it can boot from a USB device, it will boot Ubuntu and give
you a functional system, like the CD, but with any excess capacity on
the USB drive as storage, which is an improvement on a Live CD for a
functional system.