How to install and boot any distro from USB flash?
 

I need help setting up the bootloader(or perhaps the rest of the installation) to boot a normal desktop (non-live) distribution from USB flash drive.
I have already installed the system, and set up LILO, but neither boot sector of partition nor MBR seem to satisfy BIOS. I get "Operating System not found". The boot partition is set active.
My machines are configured and boot from USB just fine, but only the "live" setups. This time I am installing the system where USB flash is the hard drive.
Please explain me how to boot desktop distros from USB flash!!!
Thanks in advance!
[EDIT]
Just in case, LILO was written to the correct drive, sda. No other USB drives present.

Some PCs have a problem with booting USB drives that do not have an active FAT 16 partition. You should create such a partition - a small one , the smallest permitted one, will do, make this partition active and install the boot loader here. The OS can be installed in another partition.

I tried that and I got
I tried again thinking there is corruption, but it still does it. The FAT 16 partition is sda1 and set active. LILO installed on sda1, no MBR present.
What am I doing wrong?

Did you visit pendrivelinux.com?

Everything they have there is live. I need a rw filesystem.

We were in the right direction earlier, as FAT 16 partition produced a common LILO error, meaning that BIOS found the boot record. It would probably be better to figure out how to make LILO work on USB, as this would apply to all distros.
I read that the "L 99 99 99 99 99 99 " type error points to a corrupt MBR... So I wonder if there is any way to fix MBR from Linux. I don't have a Windows installation on that drive, so I won't have access to Windows recovery console via the install CD, even if I had one that is.