Originally from http://nsaunders.wordpress.com/2006/11/06/a-usb-stick-grub-and-ubuntu/
1. Prepare the USB stick
This assumes that you have a working machine on which to mount the stick. All operations should be run as su or sudo.
2. Add GRUB bootloader to the stick
Mount the stick again. We're assuming that the mount point is /media/usbdisk.
Now use an editor (e.g. nano) to open /media/usbdisk/boot/grub/menu.lst and add these lines:
title Ubuntu root (hd0,0) kernel /vmlinuz root=/dev/rd/0 /init=/linuxrc rw initrd /initrd.gz boot
You can also add a "ramdisk_size=" parameter to the kernel line. These lines tell grub which files to use when booting. We don't have these files yet, so...
3. Copy required files to stick
4. Boot and install
You're ready to go. You might have to enter the BIOS to make sure that your machine can boot from a USB device and change the boot order. My BIOS has a "USB-HDD" option which works for sticks - this is quite common, but there are variations.
In theory the machine will now boot from your stick, GRUB will start up, find the kernel and ramdisk images, locate the ISO and the installer will run as it would from a CD. These instructions derived in large part from Rene Mayrhofer.
Well there you have it folks. Alhough my attempt at this works for the booting part, but fails when looking for and iso image. Not sure why. Back to google...