With the release of OS X Lion, Apple has included a few options to perform both maintenance and recovery routines on your Mac. These include a local recovery partition that allows you to boot to your system and reinstall Lion and run tools like Disk Utility. In addition, Apple is now including an Internet recovery option for new Macs that allow them to reinstall Lion without the need for any local media.
The recovery partition
Apple's recovery partition is a small boot volume on your main boot drive that contains a number of key features for running and maintaining OS X Lion. The partition is a small 650MB volume that contains a boot loader and a disk image that contains the OS X installer and utilities. You will not see the volume when booted into OS X, but if you restart your system with the Command-R keys held down, then you will boot to the recovery volume. Alternatively you can hold the Option key at bootup and you will see a drive called Recovery HD listed as a boot option next to the Lion drive and other bootable volumes in OS X.
This volume's primary purpose, as its name suggests, is to perform maintenance and recovery tasks of an OS X installation. It will allow you to repair and reinstall the OS X Lion installation if needed, or run disk maintenance with Disk Utility just like you could do with prior versions of OS X by booting off the OS X installation discs. In addition to providing utilities, if you have an Internet connection then you can launch Safari in the recovery partition to access Web sites like MacFixIt and Apple Support for help with managing your system.
Beyond recovery routines, the Recovery HD disk is used to manage encrypted volumes on your system, so if you have enabled FileVault in Lion, then the keys used to decrypt the volume will be stored on the recovery partition.
The recovery partition is the default diagnostics and repair tool for Macs running Lion, but if you have a new Mac model that was introduced after the release of Lion (including the latest Mac Mini and MacBook Air models), then the system comes with the capability to recover over the Internet.
To use Internet recovery, you hold the Command-R keys down just as you would to boot to the recovery partition, but if the partition is damaged or missing (such as if you installed a new hard drive), then the system will resort to contacting Apple's servers to download a boot image (similar to the NetBoot option that has been available to OS X for a while) that contains the tools normally kept in the recovery partition. These tools will load in RAM and allow you to fully partition and restore your hard drive, and install a fresh copy of Lion onto it.
The requirements for the Internet recovery option are either a direct Ethernet connection or a WPA2-enabled Wi-Fi connection that has DHCP enabled. The system will prompt you for your Apple ID and password, after which it will confirm your system's serial number and then download the approximately 4GB recovery image for installation.