You should be using Kubuntu 7.10 for one thing over 7.04.   I had problems with 7.04 and the one before.  The last good one for me was 6.06.1 LTS.
http://puppylinux.com/flash-puppy.htm
Boot from a LiveCD of Puppy, from "Setup" menu you will find an entry called "Puppy Universal Installer". Select that, and follow the simple instructions.
or
Boot from a LiveCD of Puppy, use ISOMaster and extract the 3 files: 
initrd.gz, vmlinuz and pup_xxx.sfs.  Copy those to your USB drive manually.  You will probably have to mount the drive first.  ( http://puppylinux.com/flash-puppy.htm )  Follow the  caveats and stuff.  They recommend this method only for an upgrade of an existing USB Puppy system.
Last night I got an Excalibur EXC4:4 gb usb microdrive .
At $19.99 it was a must buy of sorts.
One intended assignment is a portable bootable Linux drive.
Anyone want to show off their "Least Steps" methods to install Puppy or other small Linux onto this?
Both for someone who does NOT have a linux box and /or from Kubuntu 7.04.
Thanks in advance
--
Oren Beck