1. Create two or more partitions in one USB disk.
  2. Install any Linux system in second or later partition.
  3. Install GRUB2 in the disk. Boot directory is the /boot on the partition where Linux system is installed.
  4. Attempt to boot in the disk.
  5. Error: Out of disk.

(In rescue mode, shell can read the files inside /bin but cannot read the files inside /boot, /usr, etc.)

Why does this happen and what should I do to solve this problem?

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Maybe the size of the first partition is too small, so that initrd can not be fit into it. Don't know, just a guess.

Check with an increased partition size.

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It would raise an error at installation time, not boot. – grawity Oct 8 '11 at 19:11
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