I've been looking for something like this for a long time to stop my Macbooks from turning off when the screen was closed!
It looks like everything works as advertised on my 2011 MBA / 10.7.3. However, I think it could be so much better with a new mode that is a mix of
"Prevent sleep with lid closed, displays will sleep"
"Allow sleep timer"
It would act like the first, but also specify a timer so if you forget it too long, it will eventually go to sleep. The timer would start counting when the lid was closed and never be in effect when the lid was open.
This way, I can close the computer to carry it around, but if I don't open it after a specified amount of time, it will sleep. I think a lot of people would like this mode since it keeps the computer awake (including network connections) if you're just taking the laptop around your home or office. However, it will sleep after some time in order to save battery power and prevent overheating.