Puppy Linux
I've read a few requests / comments in these forums regarding a lightweight and portable Linux distribution.
One such distribution, which is already packaged ready for a USB key, is Puppy Linux (http://www.puppylinux.org) with a footprint of approximately 60MB.
A video exists showing how to mount Puppy Linux on a USB key (http://rhinoweb.us/howtomountausbkey.htm).
Puppy Linux's mission statement says:
* Puppy will easily install to USB, Zip or hard drive media.
* Booting from CD, Puppy will load totally into RAM so that the CD drive is then free for other purposes.
* Booting from CD, Puppy can save everything back to the CD, no need for a hard drive.