may be morphix is the one for you. It has a lighter version which only takes 185M that fits in a 256M CF and if some trimming is done, may be in a 128M CF

As for the booting from USB Pen/CF, I believe it is partially a machine thing(the latest bios can boot from such a device as far as I know) and partially a linux thing(how to load the proper drivers such that the USB drive comes to light at the very early stage).

I am working on this direction, but at a very early stage. My goal is to carry a number(one or two) of mini-cd/CF card/pen drive that I can go anyway and borrow a machine be it running windows/linux and just boot mine on it.