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I have a 1st generation MacBook Air running Leopard 10.5.8. Recently it's not working very smoothly anymore. I've my Lion 10.7.4 retail DVD with me. When I boot up to the Lion CD, it shows that I can't update from the current OS.

So if I use Disk Utility to format the hard drive, then will the installation install a new, clean Lion to my hard drive?

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There was never a Lion retail DVD. Either you burned your own (which is legal) or it's the retail USB disk. – CajunLuke May 25 '12 at 17:25
I got the disk image from my friend and the file name has "retail" so that just put the "Retail" word in my text. – Nam Phung May 25 '12 at 17:44
OK. It's probably a copy of the retail USB disk. It should work in any case. – CajunLuke May 25 '12 at 17:49
up vote 0 down vote accepted

From the Apple OS X Lion website:

General requirements: Mac computer with an Intel Core 2 Duo, Core i3, Core i5, Core i7, or Xeon processor

The MacBook Air 1st gen has a Core 2 Duo processor. source

So it should work.

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What you didn't cover in your answer: the reason you can't install Lion now is that it will only upgrade Snow Leopard. A clean install should, indeed, work. – CajunLuke May 25 '12 at 17:26
I'm new to Mac and I only upgrade Snow Leopard to Lion only. When I boot up the same Lion disk and click on install Lion. It's show the Local HD and said cannot upgrade The things I wonder that this disk is support clean install also or just upgrade process? – Nam Phung May 25 '12 at 17:42
@NamPhung All OS X install media should support both clean install and upgrade. – CajunLuke May 25 '12 at 17:50

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