I believe (haven't used it myself) it creates the Recovery HD. It's a hidden partition, accessed by restarting with cmd-R or opt then selecting it. It only contains utilities, including the ability to restore from Time Machine or reinstall Lion (which would need to be downloaded).
The full install DMG boots by starting up with opt and selecting it, or setting it in Startup Disk. It contains all the utilities of he Recovery HD, but has Lion included in the DMG - it doesn't need to download it.
Edit: I just occurred to me you can just restore your full Lion DMG back onto the USB stick. As long as you don't repartition it, the Recovery HD partition won't be affected by anything you do with the main partition. Of course, doing that makes the Recovery HD redundant... Ah well, Live and learn
It's too bad Apple's tool erases the device you wish to install the Recovery HD on. I know using
diskutil from the command line, it can be added by resizing the original partition and creating the small 650MB partition in the new freespace. Resizing wouldn't erase anything on the original partition.
Seems like Apple could have done the same, though what they did was simpler and doesn't require the original partition to have unused space at the end of its allocation.
If 10.7.1 comes out as a delta (which it most likely will be), then I imagine installing Lion wouldn't be any different than previous OSs - you would have to install the .0 version first, then update it.