- First find an empty USB flash drive. I recommend at least 8GB, if you plan on saving changes to the drive. 2GB should work if you don't plan on installing updates.
- Partition the drive to have:
- one 750MB partition formatted as fat32
- one partition with the rest formatted as ext3 with the label casper-rw
- Use UNetbootin to install your favorite distribution's live disk (I use Xubuntu)
- Then reboot your computer and boot off the USB flash drive and install updates if desired!
You now have a working USB rescue disk!
I have found this to be slightly outdated. I now recommend using Linux Live USB Creator instead. As this software can even format the drive for you and install VirtualBox software to run inside windows.
Here is where I downloaded the ISO from: http://cdimage.ubuntu.com/xubuntu/releases/