Here is something interesting i have found. The thing is UNetbootin. This software either downloads or uses your own iso to create a bootable system on your USB drive. So it seems it is possible to do this way. I have the 512mb disk ready and just installed the unetbootin and not yet booted to the USB but going to do that once i finish the network stuff on this laptop. Just for the information, those who are using ubuntu can download the Unetbootin from the software center and then run it. Just select the .iso file downloaded or download online using the UNetbootin, so that it can download the software on your system. It also lets use the erase or format option if you need. I am thinking that this should work because most of the time UNetbootin method works for ubuntu and some other distros. It's just not sure that distros like slitaz and puppy are possible. But they have now supporting these distros in their menu options as well.
great tool... i use this to create Windows XP USB installations for my Netbook... although i sometimes have issues with creating Linux USB installs, so i ended up using other tools like Universal USB Installer or YUMI