If you have a Lion installer on a USB thumbdrive, you can use it to upgrade your Mac from Snow Leopard to Lion, but if you have an older version of OS X you can’t upgrade. You need to first upgrade to Snow Leopard OR you can erase everything and do a completely fresh install of Lion. After installing Lion on my iMac, I wanted to delete everything on my laptop and do a fresh install of Lion. But the installer will not install over an older version of OSX. I had to delete the old version of OSX, then install Lion from the USB thumbdrive. Here’s how to do a fresh install of Lion.
1. Get a Lion install USB stick. To get a Lion installer you can purchase one on a USB thumbdrive from Apple Store ready to go, or you can purchase and download Lion online from Apple and then make a USB installer – see this post for how.
2. Boot off the Lion USB thumbdrive. To do this restart and hold down option key until you get a choice to boot from your Hard Drive or the USB Lion. Select the USB drive when it appears.
3. Don’t install Lion, instead go to ‘Disk Utility’ and then ‘Erase’ your main Hard Drive. (OSX Journeled Extended format). THIS WILL DELETE ALL YOUR FILES OFF YOUR COMPUTER AND YOU WILL LOSE THEM.
4. Now Quit out of ‘Disk Utility’ and you will be able to install Lion on your freshly erased Mac.
NOTE: IF you want to keep all your files and settings this won’t work. So to keep all your files you’ll need to either (1) upgrade to Snow Leopard first or (2) do a time machine backup before you erase everything, then ‘restore’ from the time machine backup when you install Lion.