Well gotta be honest with you, I tried, even called apple care where they also gave another solution (see links:)
http://www.trickyways.com/2011/07/how-to-make-mac-os-x-lion-10-7-bootable-usb-fl ash-drive/
http://theappledaily.com/2011/07/20/how-to-install-os-x-lion-from-usb-pen-drive- clean-install/
Yet none of these actually worked in my case. So the situation seems to be that IF you have 2 partitions on your HD, then the only way to install Lion, is to completely erease your disk, make 1 partition SnowLeopard, upgrade to SL 16.8 whatever and then upgrade to Lion, and then reinstall your original harddrive.
I believe, if apple throws a new product on the market for $34 they should have done the some trials on installation problems, and this problem should have came up. And if this is the case, they should just put a big sign on the BUY button saying IF YOU HAVE 2 PARTITIONS, YOU ARE GOING TO HAVE A **** OF A TIME INSTALLING THIS BRAND NEW SOFTWARE!!!
But apple didnt do this, so I did not only spent $34 on a program that I cannot install, but I spent another $30 on calling to customer support and finding out what type of a challenge I am facing here. so now I spent $64 on a software that I cannot use + frustrations.
THANK YOU APPLE!