OK, I guess I was right that it would need a ton of RAM.
Hmmm.... That does leave the idea of remastering on the table, though. Start with VL-Standard-Live and strip it down. Create a VL-Live mini which, like Slax or GoblinX Mini, would fit on an 8cm mini-CDR and run in 512MB of RAM. It might be fun to try and build that.
I still think an OS that fits entirely into a reasonable amount of ram (512MB for example) is the best choice for a USB stick. A system loaded entirely into RAM absolutely flies. Right now I can do it with Wolvix-Cub and AliXe. It would be neat to have a version of VL that could do it too.