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Almost always, you have to settle for a liveUSB.
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Not at all! I've got a fully functional OS packed with software on a 4GB usb flash drive that remembers everything from one session to the next. I use it on my desktop computer all the time. I'm using it on my Eee notebook too, but the ethernet isn't connecting with that right now -- otherwise it's AOK.
Here's what I did.
Get the PCLinuxOS Gnome live CD.
Install it to the USB drive (there's a USB option in the installer). (This step took over an hour for the computer to complete.)
Change "sdb" to "sda" in three files: device.map, menu.lst and fstab. (I have no idea if you'll have to do this or not.)
Get GPartEd on a live CD.
Use that to enlarge the main system partition on the flash drive to about 3.5 GB so there's room for more software. (This step also tied up the computer for a very long time.)
You can then easily use Synaptic to remove software you don't want and download anything you want. Watch out for Open Office -- it's huge.
I.