If you can find it, check out the January 2009 issue of "Linux Format". The cover feature is about installing to a USB stick. When I was using Ubuntu 8.10, there was even on option in the menus to do this for you automatically. I'm not sure if this is standard or just part of the respin I was using.
The problem with DSL (Damn Small Linux) is it uses an older version of the kernel due to space limitations. This might not be an issue for you, but I couldn't get it to work on my laptop.
You can't just install it like a regular distro either. thumbdrives have a limited number of writes to each memory cell. Linux does A LOT of writes to the file system. You need to configure it correctly or you will "burn out" your device in short order.
I'm in ubuntu right now and rarely use XP. I only boot XP when work requires it, but I'm thinking of installing vmware workstation and just VM'ing my work PC when I need it and going straight linux.
If you don't like it, all you have to do is reformat the partition. The only cons to that is not having a contiguous partion (you'll have atleast 2) and you'll still have grub - which you can remove and revert back to the XP loader; it just takes some extra work (minor).
You can find USB hard drives. They're a little larger than a USB stick, but they don't suffer from the aforementioned problems.
Actually, Linux on a thumbdrive is NOT a bad idea...you just have to configure it correctly. Turn of journaling, etc...you can set it up mount the hard drive of the computer you are using, so you can save files. I've considered doing it, because at work we only have some lame ass WindowsXP boxes that we share. I would love to be able to us my own desktop and decent tools. I am stuck with Outlook and Ms Office200?
do you have a cdrom at hand? you could then run knoppix from there, and make its 'hdd install' to the stick.
sort of did the same too.
my EEE 701 started 'loosing' his wlan card so I gave it away for service... but 14 days...
So, I bought an acer aspire one L
With the original os it took amazing 15 seconds to boot...
(actualy its running ... you guess it... debian now, and probably not booting that fast anymore..)
I started the one up in the shop, and was realy amazed. all the mini wintendos arround it were sloooouuuwww compared to it.
Plus... in comparizon to the eee it has bigger keys which is quiet good.