I then went on to the next step and erased the hard drive disk, and re-downloaded Lion
That was excessive and unnecessary, Lion could have been replaced only leaving everything else alone.
I went ahead and downloaded the software for my WD passport external HD so I could reload all my files ect... After the download of the software I restarted the iMac, and up came the white screen of death again.
The software was your problem, it likely installed a at boot kext file that's not compatible
Hold the Shift Key down while booting (wired keyboard) then uninstall and or follow #8 Step here
Contact WD about the issue, hopefully it won't trap your files, use a powered USB hub.
It turns out my hard drive on its last leg, and ultimately completely died. I took it in to Genius Bar and they were able to replace my hard drive. Now we are back and running. Maybe we will get 5 more years.