Just had a development!
I used the startup disk in recovery mode to 'restore' the OSX by copying the contents of the USB drive to the hard drive and now the laptop is running from the HD and seems to be running just fine so far.
Next step though is to get it updated but I am concerned that if I try to upgrade to Yosemite its going to cause more problems.
Do you have any advice about Yosemite? I found that when I last tried to install it, everything downloaded fine but the install just crashed with a long error log and the spinning wheel and just said it would be 'about 15 minutes' ( I left it over night and nothing changed)
Ideally I just want to update to the Last Mavericks but is this possible anymore?
Thanks
I'm assuming you meant that via Recovery Mode, using the USB Drive and Internet Recovery, that the Lion OS was installed on your internal hard drive, and that you did not actually just copy the contents of the USB drive. Is that correct? To verify this, while your Mac is off, take out the USB stick, and start up your Mac.
If I were you, here are the steps I'd take:
1. Boot your Mac from the USB stick, run Disk Utility from there, and verify that your internal hard drive is OK. Given that the internal hard drive is no longer empty, when you select that one (and only) visible partition (note I said partition. That means at the partition "level") in Disk Utility, you will be able to 1) Verify and Repair Permissions, and 2) Verify and Repair the Disk.
2. Once that is done, re-start your Mac from your internal drive, take out the USB stick, go to the Apple store, and download Mavericks. Once that completes, there will be a file entitled "Install OS X Mavericks" within your Applications folder.
3. Make another copy of that file to another location on your internal drive. To do that, click on that file (don't double click it), and while the file is still selected, hold down the Option key, and then drag the file to the other location on your Mac. This will make an exact copy of that file in another place, as after you run that Install OS X Mavericks" file from your Applications folder, it will be gone.
4. Launch the Install OS X Mavericks file, and let it do its' thing (ie, updating Lion to Mavericks).
5. Restart your Mac. If the version of Mavericks is anything less than 10.9.5, you need to install the last Combo Updater for Mavericks. You can get that here:
http://support.apple.com/kb/DL1760
6. Finally, re-start your Mac from the USB stick, and run Disk Utility from there to 1) Verify and Repair Permissions, and 2) Verify and Repair the Mavericks partition on your Internal Drive. This might be over kill, but better to be safe than sorry.
Use your machine for a few days to see how everything works. Do this without the USB stick in. Once you are satisfied, you'll need to make a bootable backup of your internal drive to another, external device. I doubt that 32 gig flash drive will be large enough, and it would be best if you invest in an external drive. You can get external 1 TB drives for as little as between $50 and $60 these days, and especially with the holidays coming up. Stay away from Western Digital drives, as they do not "play nicely" with Macs. Get a Seagate one. They work well.
Once you get that external drive, you can use Disk Utility to format and partition the drive. You can then use the excellent backup/cloning program in "free" mode called SuperDuper! to make a bootable backup to a partition on that external drive. You can get the latest version of SuperDuper! from here:
http://www.macupdate.com/app/mac/13803/superduper
I can tell you from direct experience that having a bootable backup created via SuperDuper! has saved me at least twice. And, it is a piece of cake to do a restore from that backup.
Once you have that backup on that external drive, you can then try and upgrade to Yosemite. If you again have issues, at least you will have the bootable Mavericks backup that you can restore your internal drive to. Assuming that the upgrade to Yosemite goes well, you can again use SuperDuper! to make a bootable backup to that same partition on the external disk. And, going forward, you should be into the habit of making such a backup at least once a month, and once a week is even better. That is what I do every Saturday, for both of my machines (and I do it to two external drives, for each of my Macs (I also run some other Disk maintenance tasks as part of that)..