Bartpe (Windows live CD) has been around for long enough (and given they take out update sites: http://www.theregister.co.uk/2007/08/30/autopatcher/ there has to be something in it)
http://www.nu2.nu/pebuilder/
It is probably something mentioned in the EULA which if that "what is legal" is to be believed is no good in your part of the world:
http://gbatemp.net/index.php?showtopic=689...ndpost&p=905122

Also I would check machine you are booting off as some do not agree with being booted from a USB stick.

 

Flash drives have a limited write capacity (most things do but these are especially prone when you line it all up).
More recent/high grade stuff is OK and it is somewhat of an artifact like pulling a drive out while writing/pulling a USB stick without stopping it first: modern stuff tends not to go for the catastrophic meltdown route (although it is still not advised) but try to keep stuff like virtual memory (unless you stick it on a normal drive), logfiles (unless they are held in memory/buffer in which case you can probably do it) and other repeated disc write activity to a minimum. They also tend to come with an onboard controller to mark off bad sectors and replace with some of the spare ones available negating it yet further.

As for OK I know quite a few people to do it as a (more) secure OS (stuff like at in internet cafe/using someone elses machine) or as a repair kit although it tends to be run from a CD/DVD and have a USB stick for everything else or have the USB stick be the drive that the CD/DVD decompresses too (main kernel is on the disc but less used apps on the drive).

 

I'd use something lighter like Zenwalk (more optimized for Xfce).