Start by booting from your Snow Leopard DVD. Put the DVD in the optical drive and hold down the C key on your keyboard while booting.
Once you're booted from the DVD, launch Disk Utility. Run REPAIR DISK on every partition, repeatedly until no errors are found. If errors are found and not repaired, or you never get to the point where a run of REPAIR DISK results in no found errors before you run out of patience, then Disk Utility can't solve your problem.
If you repair all the issues with Disk Utility while booted from the DVD, restart normally, put the DVD away, and try your upgrade to Lion again. It would be best if you were to do a full backup of your hard drive first, and make sure you have plenty of free space on the partition which you're upgrading to Lion.
If you can't repair everything while booted from the DVD, contact AppleCare if you are still under warranty; you can definitely get free help at your nearest Apple Store. If you are not still covered by an AppleCare warranty, you can call your local store directly and make an appointment at the Genius Bar - unless your assigned Gene-yuss is having a bad day, he'll probably be able to fix you right up and do it for free, too, no AppleCare notwithstanding.
Hei guys thanks for the fast replies and tips, it finally worked! i decided to clean everything up by wiping all of my data which means 'start fresh' and re-install OS X Leopard. yes the OS X Lion works superb on my iMac, guess this is not an HDD failure or 'physic' damage. So much thanks!
NOTE: Oh for those of you who are having this same problem as i do, keep in mind dont panic to much and act crazy with your Apple imac's or macbook's, ease up and do as i say:
when it tells you, "Macintosh HD is damaged and can't be repaired" do as it say, restart your device, once it is restarted quickly insert your Snow Leopard Installation Disc and it will take you to the 'installation screen' once your there you will see 'utility' up in the bar click that and click disc utility, once there click on your Macintosh HD and click on 'Verify Disc' & 'Repair Disk'. Then finally, restart your device again, If it runs smoothly then re-install OS X Lion off from the App Store (Again, and yes im not joking). If it doesnt run smoothly, re-install your Snow Leopard OS then install OS X Lion from the App Store.
Cheers everybody! Thanks for the fast and very Helpful replies!