Why is a second download needed again?
Isn't there an "InstallESD.dmg" file tucked away somewhere?
If you purchase Lion from the App Store, you get a 3.76GB application called "Install Mac OS X Lion.app". If you show package contents of that app, you discover that the bulk of it (at ./Contents/SharedSupport/InstallESD.dmg) is a 3.74GB disk image of a full Lion installer. The remaining 20MB is just a GUI wrapper around that install image.
If you install Lion from that application, one of its post-install scripts deletes the application if it's still at its default download location (in /Applications). If it gets deleted, no problem. You bought it from the App Store, and can therefore re-download it for free to any computer associated with the Apple ID you used to purchase it.
You can also install Lion by mounting InstallESD.dmg (or, as I mentioned, a clone of it). When mounted, InstallESD.dmg looks and behaves just like one of the install discs we've become accustomed to over the years.
When you install Lion, by whatever means, it tries to create a Recovery HD partition. However, the Recovery HD partition is only 650MB, and is not large enough to contain a full copy of Lion. It's only a very compressed copy of the installer, minus the actual Lion payload. (It does, apparently, contain Safari and Disk Utility. It may contain enough to re-install from Time Machine.)
If your machine shipped with Lion, you have a Recovery HD partition pre-installed. (You also, of course, have Lion itself pre-installed.) In addition, there is in firmware enough smarts to configure an internet connect, and download a copy of Recovery HD. This "internet recovery" lets you proceed as if you had a Recovery HD partition, even it has been lost for whatever reason. Recovery HD, once downloaded by firmware (or found on disk), turns around and downloads Lion. Notice that the firmware is not large enough to contain even a full copy of Recovery HD. (If it were, you wouldn't need Recovery HD.)
If your machine shipped with Lion, then you did not need to buy Lion from the App Store. If you didn't, you cannot download "Install Mac OS X Lion.app" for free, and don't have access to a copy of "InstallESD.dmg". (Since I did purchase Lion in the App Store, I cannot tell if it could also be purchased from a machine that shipped with Lion. If it can, $29 for Lion is a lot cheaper than the USB installer.)
No matter how you install Lion, it
always goes out to the internet to (a) update Lion to the latest version, and (b) verify that you're entitled to install it. (That is, you're either installing onto a machine that shipped with Lion, or your Apple ID purchased a copy.)
Most Apple docs say simply that installing Lion requires a Wi-Fi connection, which has got to be inaccurate. (A Wi-Fi connection to a router that is not connected to the internet isn't going to work; an Ethernet connection to a DSL modem should work just fine.) I did see one doc that explicitly says that installing Lion requires a
broadband connection to the internet. That requirement I believe, but I can't seem to find that document now. I think the "Wi-Fi required" language is a carelessly worded attempt to say "a cellphone data plan won't work".
When Apple says you need a network connection, I don't know if they mean it's not practical to install without one (as in, you won't get the latest version), or that they will simply refuse to install if you don't have one.
