iMac A1195 2006 wont boot

Hi All

I hope someone can help me instead of refering me to Apple service centre.

I have an iMac A1195 white AIO system late 2006, this i bought 2nd hand and works seamlessley, when i got it it had Snow Leopard installed and I upgraded it to its max OS Lion 10.7.5. All went fine and the mac was running great, I decided to sell the unit on so I decided to reinstall the OS ready for new owner. I erased the drive and put my Snow Leopard disk in that was originally on but the system said it couldnt install due to it being older that what was installed. I purchased a USB stick with Lion on but the system wont recognise the USB drive, I have tried all permutations of keys as suggested to get it to boot to no avail. The mac just keeps coming up with the folder with question mark, it seems like I no longer have a recovery drive. If i put the Snow Leopard disk in it will boot and i can get into terminal, disk utilities etc and check my hard drive and all checks out, but I cannot get it to boot and reinstall Lion. I also have a macbook, is it possible to say use this mac to restore the imac? I am pretty versed with PC and computers but this has got me stuck. Iknow its an old machine but its in mint condition and I would like to get it back up and running again and taking it to Apple service would be more than its worth.

Any help or advice would be greatly apppreciated (apart from scrapping it)

Please help as im pulling my hair out LOL

Thanks in advance

Bill