I used this one a while ago, using fedora 12, with 1.5GB of persistent storage:
https://fedorahosted.org/liveusb-creator/
You can check that it worked by seeing a 1.5GB file in the usb key, under /LiveOS :
$ ls -lh /media/FEDORA/LiveOS/overlay-FEDORA-79BE-2DC5
-rwxr-xr-x 1 georges georges 1.5G Dec 12 2009 /media/FEDORA/LiveOS/overlay-FEDORA-79BE-2DC5
The path will be different when booted on the key, or when the key is plugged on a windows machine, but you get the idea
My usb key is dns server, dhcp server, ftp server, http server, and a few other things. So it definitely works.
One thing I don't do though is update the software that's on it because that would use a lot of persistent storage
Have fun!