I am running ubuntu usb edition right now, and it works fine. But I partitioned entire flash drive in one partition and also made a small partition for linux swap. I also installed bootloader on the pendrive, and not the hard disk, and it works. I prefer to press F12 to access the boot screen at start-up, and then select Boot from USB Flash. I could change BIOS settings to place usb boot first but I like it this way better. You may have to press a different key to enter boot screen at startup but it's the same.
Don't forget this one - leave no Fat32 or NTFS free space on the pendrive, I mean you have to partition entire usb flash disk for linux as you find it fit (i find it convenient to make a large single partition ext3 or ext4), and also make a max. 1-2 gb partition for Swap, and then boot the live DVD, and install your system. You may have to format partition again during ubuntu installation, and maybe make some other changes, but on the whole it should work just fine in the end.
Also, don't forget to use the correct iso image for your machine, 32-bit or 64-bit, pae or non-pae and so on.
When asked where you want to place bootloader, choose the usb stick, do not choose the hard disk, I mean place bootloader on the same usb stick where you installed ubuntu.
Good luck with this one, Grzegorz!