Download this:
OS X Lion: About Lion Recovery Disk Assistant
Use it to create a bootable Lion installer.
Make at least two complete, independent backups of all your data on different storage devices, using Time Machine or a mirror-backup tool such as Carbon Copy Cloner. One backup is not enough. Do not proceed until this is done.
Write down the Apple ID and password you used to buy Lion from the App Store.
Boot from the SL installation disk and partition (do not erase) the internal drive. This action will irrevocably destroy all data on the drive. Create a single partition with the default options.
Next, boot from the Lion installer you created earlier and install Lion. You'll be prompted for your Apple ID and password.
Boot from the internal drive and go through the initial setup process, choosing to import data from one of your backups.
Boot from your recovery partition, launch Disk Utility, and run "Repair Disk" (not "Repair Permissions") again. There should be no errors. If there are errors, you have a hardware fault in the mass-storage subsystem.
Assuming there are no errors from Repair Disk, boot as usual. You can then try again to activate FileVault, if you wish. Review the documentation thoroughly before you begin:
OS X Lion: About FileVault 2
You must understand that if you forget your FileVault password, and you haven't stored an alternate decryption key with Apple or elsewhere, your data is gone forever beyond any hope of recovery (unless you have unencrypted backups, which tends to defeat the purpose.)