Lion may fail to install on a drive that has previously been used for Time Machine backups, or that has previously been used to install Linux or similar Unix-based OS. Typically this due to of left over invisible files and partitions on the drive, but it can also happen with drives that don’t have a GUID partition table.
To address this, Apple has published Knowledgebase article TS3926, detailing what to do if you get the message “This disk cannot be used to start up your computer” when attempting to install Lion. Their fix is to either reformat the disk, or to use Disk Utility to resize the partition you want to install Lion on. http://support.apple.com/kb/TS3926