BOOT FROM DVD, GO TO DISK UTILITY
GO TO " FIRST AID ".
YOU CAN SEE TAB NAMED
ON THE BOTTOM
1. VERIFY DISK PERMISSIONS
2. REPAIR DISK PERMISSIONS
3. VERIFY DISK
4. REPAIR DISK
HIGHLIGHT "MAC HD" VERIFY "DISK PERMISSIONS AND THEN CLICK ON REPAIR DISK PERMISSIONS"
AND THEN CLICK ON "VERIFY DISK AND REPAIR DISK"
Do you have an external drive? If you do backup any data you may have that's important to you and begin Lion Recovery as outlined here:
Once started you should have the option to use Disk Utility to either do as the other poster has advised or reformat and reinstall. If you've restarted 20 times and System Preferences keeps hanging then clearly there's something not quite right somewhere? Beyond this and assuming the MacBook Air is a new one and therefore still in warranty I would take it to your nearest Apple Genius Bar or Apple Authorised Repair Specialist and get it looked at. It's possible you may have a problem that goes beyond simply reinstalling the OS and formatting the hard drive.
I have now done everything including recovery. But still no answer to the problem.
What I have noticed however is that it, the problem exists as the system cannot find any screensaver or background files and none are listed in the file listing e.g. arabesque appears to be a standard apple screensaver but this file is not on the computer. Is there a method of sepately downloading these files onto the computer and creating the relevant Directory which the system will find?