As great as Mac OS X has become over the years, it is not immune to issues with its inner workings. And when there are issues that are preventing you from running your system properly, or even booting, we need to revert to some boot-time diagnostics.

With Lion, comes the built-in Lion Recovery Tools known as Recovery HD. 
To get to this console, boot your machine while holding down Command+R. Here you will be able to check your drive, browse the web, restore from backup or even reinstall Lion completely (After it downloads the 4GB of files).

But this is of no use to you if your drives won’t let you boot into the Recovery HD console. So to still have these tools available at all times, you will need a bootable Lion installer. 
Mid-2011 Macs, will now support a new feature called Lion Internet Recovery, after the latest firmware update of course. This will actually allow your machine to boot up and contact Apple’s server immediately. After making contact, and identifying itself, it will actually download the entire 4GB Lion installer and reinstall it to all its former glory.

Of course if you don’t have this great feature available, then you will definitely need to revert to the installer drive. 

So in order to create the installer drive, we will need to let Lion initiate a reinstallation process, where it will go ahead and download the 4GB payload from Apple’s servers, and then interrupt the process before it reboots to begin the actual installation, so that we can grab the installer data, and use that for our drive.

In order to get this done, follow these steps:

1. Boot into Recovery Mode. Do this by holding down Command+R at startup. You may need to use Command+Option+R to force Lion Internet Recovery mode to initiate.
2. Connect your external drive now. It will need to have at least 12GB of free space on it, and formatted in Mac OS Extended (Journaled), with a GUID partition table.
3. Ensure you get to the Mac OS X Utilities Page.
4. Select to reinstall Mac OS X
5. Click continue to move through the process, and begin the “download and restore your Mac OS X” procedure.
6. Select your external drive as the destination, and begin the download.
7. Watch the download’s progress closely. 
8. When it gets to the end, and says “About 0 seconds remaining”, get ready!
9. Once this is completed, it will momentarily cleanup a few temporary files, and reboot.
10. Once the screen goes dark for the reboot, unplug your external immediately!
11. If you miss this, your machine will boot into the new installer, and If you interrupt this installer now, you will need to reset your Mac’s PRAM and NVRAM.
12. Once you unplugged your drive successfully, go ahead and let your machine boot normally, or even switch to another Mac if you like.
13. Open your external drive, and you will find the Mac OS X Install Data folder. In there you will find the important file, InstallESD.dmg. It should be just under 4GB.
14. Go ahead and mount that dmg file now in your Disk Utilities (/Applications/Utilities/) window on the left, once you have copied it onto your Mac.
15. Go ahead and select your newly mounted InstallESD.dmg. Select the Restore tab.
16. Drag the dmg file as the source, and select your external as the Destination. This can be same drive you used before, but bear in mind the next step will format the destination.
17. Click Restore, and you’re done.

Props to Macworld