Install and Run Lion (OSX 10.7) from as USB drive

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This is surprisingly easy to do.

1) Purchase and download Lion from the Snow Leopard App Store.

2) Run it once its finished (should open automatically)

3) Click continue, and then agree to the license terms (don’t forget to spend the next 3days reading them first)

4) Your now on the important screen, by default your internal drive that has SnowLeopard will be selected as the install destionation.
     BUT you should also see a “Show all disks” button. Click on this and then select your USB drive.

NB: your USB drive needs to be in Mac OS Extended (Journaled) format with a GUID partition type. A full install takes up 6.8Gb, so it should fit on an 8Gb thumb with a bit spare for fun.

5) Sit back and follow the promts, it should take about 20min to do everything with the odd click.

6) You can now boot your Intel mac using this USB drive and test out Lion before you upgrade. The performance won’t be as good as an internal, but its very useable for basic day to day stuff, internet, email and having a play around.

ProTip:
If you have a large enough drive space  (ie 10Gb+)  then copy across the Lion Installer that you Downloaded from the Mac App store, on to your. This will allow you to now use this this drive to both boot and run lion of the external usb drive, and then install Lion onto the internal drive. This is an alternative/easier way then making a boot DVD/disk from the hidden .dmg file [macworld]

!!!!! WARNING !!!!!
I tried this last night, and it did not go well. I also had a TechTools pro installed on another partition on my USB drive, as my Macbook restarted (to do the actual installing of Lion), it booted into TechTools by mistake. This must have screwed up the recovery partition on the internal and external drive, as a result the Macbook refused to boot, it would get to the apple logo, and then fail with a crossed out circle error.  I ran thru the apple suggestions on how to fix this error, but none helped. Fortunately I still had my Snow Leopard Install DVD, which allowed me to restart and instal SL back on the internal drive. I have now managed to upgrade back to Lion. My guess is that my method would normally work but you will either have to not have additional boot partitions on the drive or make sure you remove the drive before the system reboots. My advice is do not use the above method for trying to do a clean instal of Lion. 

NB: the recovery partition is almost impossible to get rid of… But Cnet has a guide for removing the partition using disk utility. Very handy !

How to Boot from the USB drive:

1) If your running Snow Leopard, go to System Preferences and then select StartUp Disk. Here change the boot disk from the internal to your USB Lion one. Then restart the machine.

OR

2) Reboot your machine and before the white screen appears press and hold the Option key to access the Startup Manager .