You won't be able to pack your MP3 collection and your gigs of vacation photos to go with you -- at least, not yet! -- but you will be able to run Linux with most of the applications you need, and bring the more crucial of your data with you as well. What's more, there are ways to run Linux from a flash drive that don't even require an OS reboot, especially if you're running Windows.
What You Need
To install a given Linux distribution on a flash drive and run it, you'll need the following things:
If you're setting up a Linux installation that will run from within Windows itself, then having USB boot support isn't required, just access to storage devices mounted from USB ports. Note that machines in some environments -- for instance, in a corporate setting -- may have administrative controls in place to prevent users from mounting storage devices on USB ports.
Which Distribution?
Your choice of Linux distribution is going to depend on a couple of things: what size flash drive you're using, which Linux distros you're familiar/comfortable with, and what features you want to support.
The size of the drive is a factor because of the amount of space the distribution will need, but that may actually be the least of your worries, depending on your budget. Flash drives have plummeted in price; just this past week, I was able to pick up a 1-GB drive for a mere $10, and a decently fast one at that. A 1-GB drive can be used to hold the ISO for a live distribution, with some room left over for persistent user data in a dedicated partition.
Most of the time you'll want to start with a distribution that is designed to run small and light. Two of my favorites in this regard are DamnSmallLinux -- probably the grand-daddy of all "tiny" distributions -- and Puppy Linux, which jams an unbelievable amount of day-to-day functionality into only a couple of hundred megabytes.
Generally, you'll need 2 to 4 GB of space for an actual fully functional installation of a distribution on the order of Ubuntu or Fedora, and if there isn't enough room on the drive for the installation, you'll generally get a warning from the installer. If you have the space for a big distro, use one, as you'll have that many more apps and that much more feature support right out of the box.

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Puppy Linux's universal installer supports everything from flash drives to compact flash cards. (click for image gallery)
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Pick A Flash Drive
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