Please Help! Problem updating my MacBook

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OEM discs and flash drives can only be used with the model they were shipped with. You'll need a retail upgrade discs, not a disc shipped with anothe MacBook.

 

You will need to find a retail version of Mac OS X Snow Leopard, Apple might sell them maybe not now that Lion is out for a few months.

 

That USB will only work on a 2011 MacBook Air...you need to purchase a retail copy.

 

At this point, procure a Lion update flash drive, and just jump straight into Lion.
http://store.apple.com/us/product/MD256Z/A

Edit: Added link to prove point, As Ezramoore said below

 

Incorrect, the USB drive would only work with a 2010 MacBook Air, the 2011 model uses Lion Internet Recovery.

OP, what you are trying to do (whether you intend to or not) is steal software. If you want to update to Snow Leopard you need to buy this:
http://store.apple.com/us/product/MC573Z/A

If you want to update to Lion you can either purchase Snow Leopard from the above link and install it, update, then open the App Store and pay for/download Lion.

OR

You can buy this:

http://store.apple.com/us/product/MD256Z/A

And do a fresh install.

Don't steal software.