All you have to do in step 1 is choosing your USB device (drive or key) on which you will install a LinuxLive.
Requirements are :
- a usb device with a FAT32 or FAT partition *
- 810 MB free (but depends on what linux you install) **
* If your usb device is not in FAT32 or FAT, you will be asked to check the option "Format in FAT32" in step 4, be aware that this option will erase the data on you USB key.
** If you don't have enough space, free some space or choose "Format in FAT32" in the options (step 4)
LiLi has not been tested on Firewire or eSata drives. If you try this options, please leave a feedback.
For more information about FAT32 limitation see Why does LiLi only uses FAT32 and FAT filesystems ?