ubuntu 8.04 hangs after login when booting from USB flash drive

I am having a problem booting into Ubuntu 8.04 from my USB Flash Drive. – thanks in advance for any help…

To begin, I have 2 PCs, one "Old" home made one ( Athlon XP2000, 768GB RAM, GeForce 7000 Series graphics card old motherboard) , that doesn't support booting from USB.
And a "New" System (DELL XPS 420 : Intel Q6600, 3GB RAM, 750GB HDD, ATI RADEON GRAPHICS HD 2600).

I disconnected the internal HDD from the 'old' PC and booted it from the Ubuntu 8.04 live cd.
Inserted my 4GB USB Flash Drive.
Double clicked on the INSTALL icon on the desktop and proceeded to install to the USB flash drive.
On completion, shutdown the 'old' PC and removed the USB stick.

then

Inserted the USB flash drive on to the NEW PC and booted it up, pressing an F key to enter the boot menu and chose the USB flash drive… The machine proceeds to boot from the flash drive and I see the UBUNTU login screen.

I login using the username and password I set up during installation.

Now the problem begins…

once I type in the login details and press ok, the screen clears, the mouse pointer is still active, the back ground remains light-brown… and that's it ! The pointer moves but nothing else happens.

I tried ctrl-alt-backspace and got back to the login screen, this time in options I choose to boot in to a xterm style window… that works.

The bottom line here is, after login the GUI seems to "hang" –

I have a couple of theories…

1) – the ATI RADEON HD2600 isn't liked by the GUI and it just gives up
2) – there is a corruption on the USB drive that prevents the bootup from proceeding (although I re-formatted and installed it TWICE)

Any suggestions or help will be most welcome…. THANKS !