Didn't solve this problem but got around it by downloading Lion from the App Store and using that instead of the Lion USB stick.

I didn't do this in the first place because when I purchased Lion originally it just upgraded my Snow Leopard installation and then seemed to have removed itself from my Downloads directory. I found that you can download it again by following these instructions from Macrumors:

"Launch the App Store
While holding down the OPTION key, click on the “Purchases” section
You should see “OS X Lion” and “Install” should now be gray and you can click that to re-download Lion (you may have to re-authenticate within the App Store with your Apple ID)."

It took several tries but I got there in the end.

:)

I am getting the same error. I do not think new mac air can download Lion from app store. I have tried and from what I have read it has to do with the fact it comes with Lion and not downloaded/installed with our apple account. Any other ideas?

I am also having trouble creating the 4.1.1 install disk, using my MB-Pro with Lion already on it.
The source is the Appstore downloaded "Mac OS X Lion Installation", a supported MB and my 8GB large target USB entered in the tool.

When trying to create the install disk, the following error appears:
"Could not format the USB stick. Make suer no other volumes with the name Kakewalk are mounted.
Error: Could not find disk for d "

When looking at the Console messages, after opening the Kakewalk tool, I also see the following error message:
osascript: Initializer-based scripting additions are no longer supported. "/Library/ScriptingAdditions/Adobe Unit Types.osax" not loaded.

Has anyone successfully created the USB disk on Lion already at all? May be it works only on SL fine.

thanks -ame