OS X could not be installed on your computer. OSX can't be installed on the disk Macintosh HD because a recovery system can't be created.

Do you have a Boot Camp partition? When you installed Lion did you use some other software to create a Recovery HD?

OK. You have a Boot Camp partition which is why the issue. See the following:

It seems the issue is that the space at the "bottom" of your available space when Lion installs it's partition is already occupied by BootCamp. The fix was to go into Disk Utility; Select your Hard Drive; Select Partition; Move the bottom of your main partition "up" a bit to create a space for Lion; close Disk Utility; Install Lion; once Lion is successfully installed, go back into Disk Partition and drag the bottom of your main partition back "down" to the bottom of the window.

In your case use Disk Utility to "shrink" your OS X partition a little more than 1 GB.

To resize the drive do the following:

1. Restart the computer and after the chime press and hold down the COMMAND and R keys until the menu screen appears. Alternatively, restart the computer and after the chime press and hold down the OPTION key until the boot manager screen appears. Select the Recovery HD and click on the downward pointing arrow button.

After the main menu appears select Disk Utility and click on the Continue button. Select the hard drive's main entry then click on the Partition tab in the DU main window.

2. You should see the graphical sizing window showing the existing partitions. A portion may appear as a blue rectangle representing the used space on a partition.

3. In the lower right corner of the sizing rectangle for each partition is a resizing gadget. Select it with the mouse and move the bottom of the rectangle upwards until you have reduced the existing partition enough to create the desired empty space. The space below the resized partition will appear gray. Click on the Apply button and wait until the process has completed.

Remember that you only need to shrink the OS X partition a little more than 1 GB. Now, when you try the Mountain Lion installation the installer will be able to make the Recovery HD.

Would you snap a pic of the DU display please? Press COMMAND-SHIFT-4 then use the crosshairs to select the portion of the screen to snap. The pic should be saved on your Desktop. Then post it here using the camera icon you will see in the message editor's toolbar.

Please stop with the All Caps. 🙂 I did explain what to do:

Press COMMAND-SHIFT-4 then use the crosshairs to select the portion of the screen to snap. The pic should be saved on your Desktop. Then post it here using the camera icon you will see in the message editor's toolbar.

You need to do this while running in OS X, not from the Recovery HD.

There you go!

You have a Fusion Drive setup on this computer? You have a MacBook Pro that has 10.7.5 installed, so this Fusion Drive setup did not come from Apple. Whatever you have it is encrypted. You cannot make any modifications until you disable the encryption.

Are you sure the computer doesn't already have Mountain Lion installed as opposed to Lion? Mountain Lion supports a fully encrypted drive. Fusion Drives aren't available on laptops, only on the iMacs at present.

Here's what I see in your snap of DU:

Frankly, I'm not sure what you have setup on the storage. Initially, I would expect that there is an encrypted drive set up via FileVault. To see if that's correct please open Security & Privacy preference panel. Click on the FileVault tab. Does it show FileVault as ON or OFF? Or when you formatted your drive did you choose the option for Mac OS Extended (Journaled, Encrypted?) Select your Macintosh HD and look at the status area to see how the drive is configured.