Here's what I did, you may need to tweak it a bit for your setup (especially your usb device - it could be /dev/sd[a|b|c|...]. Firstly I used one 1Gb USB key / thumbdrive / flashdrive / whatever, because I use the live CD image. You could use the minimal CD image and use a smaller key. It appears to me as /dev/sdb.
Your PC might need to be capable of treating the USB filesystem as a CDROM, otherwise this may not work for you. Tell me about your success!
0. dd if=/dev/zero of=/dev/sdb bs=512 count=1
The reason I did this is because I had corrupted both the mbr and partition table of the usb key. fdisk simply told me "unable to seek on /dev/sdb" and wouldn't continue. Skip this step if you can fdisk ok.
1. fdisk -l; fdisk /dev/sdb; fdisk a partition!
I join these steps together, cause they're all related to creating the partition. Make one partition covering the entire device. Something like "n p 1
2. mkfs.ext2 -L liveUSB /dev/sdb
You'll notice I'm using ext2 here. Wait for the device to finish writing, then unplug and re-plug it, or mount it manually.
3. sudo mount -t iso9660 -o loop /home/iain/Desktop/livecd-i686-installer-2008.0_beta2.iso /mnt/tmp/
There are multiple ways to do this. This is the one I chose.
4. sudo rsync -avP /mnt/tmp/ /media/liveUSB
5. sudo grub-install --root-directory=/media/liveUSB --no-floppy /dev/sdb
Remember to set your BIOS to boot from your USB drive. Now you have a live CD on a USB key. Much nicer than burning!
Edit: There are some more comprehensive and detailed howto's available with slightly different techniques: