Lion failed to install!!! Please help

[bastianblade]

I am selling my iMac to a friend, and he wants the computer to be like new. A quick Google search led me to wipe the hard drive using Disk Utility, and reinstall Lion from recovery mode(boot holding CMD+R). After it spent 2 or 3 hours downloading Lion, the computer restarted and began installing the OS..
Shortly thereafter, an error pops up:

"Mac OS X can't be installed on the disk Macintosh HD, because a recovery system can't be created. Visit www.apple.com/support/no-recovery to learn more."

The only option then is to restart the computer, at which point it attempts to install the OS again and fails. He has already paid me for the computer, and i dont even have the money anymore! Any help would be awesome.

iMac (21.5-inch, Mid-2011)

 

[Kaveman]

What do you get when you boot with the Option Key Down?

 

[bastianblade]

What do you get when you boot with the Option Key Down?

When i boot while holding the option key, there are two choices: OS X Installer & Recovery HD. It doesnt matter which i choose, the end result of either is Lion failing to install "because a recovery system can't be created"