How to Install and Boot OS X from a USB drive
Brad Bergeron explains how he installs and boot OS X from a USB drive;

You will need a 1GB or larger flash drive. It is impossible to install OS X on anything smaller. After testing this procedure multiple times, the largest free space I had after booting up was 11.6MB. You will also need the original Mac OS X Install Disc(s) that came with your computer.

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