1. Just install to the USB stick
2. I find it much easier to get lilo to work rather than grub; you may need to escape to a shell at some point in the install so you can correct the lilo.conf file.
3. You may need to edit the /etc/fstab file since the 'root' device will most likely be different (most likely 'sda' or 'hda' when booting from USB).
4. Make sure the initrd image has the necessary drivers for USB, otherwise you get a kernel panic (can't mount root).
5. To reduce the writes to the stick, consider booting to a mostly read-only system with only a few key bits being read/write. This may require you tinkering with the system start scripts a bit. For example, format the stick with 2 partitions (one for 'home') and when the system boots, mount 'tmpfs' on /tmp and mount another tmpfs somewhere else, copy the contents of 'var' there (via 'cp -a'), them mount that copy of var over the original. Of course 'var' and 'tmp' may eat a bit into your RAM and you have something that's getting closer to a Live USB which you said you didn't want.