How do I fix the GRAY boot-up screen with FLASHING QUESTION-mark FOLDER?

When I turn on the MacBook Pro laptop, I opened up the Safari Browser and its when the problem started. It was stuck on an loading infinite loop. I decided to force quit the application and/or turn off the mac by the Menu options, It did not work. So I did a "Hard" Shut-down and restarted the Mac, the Boot up screen stood gray for like a minute until the Flashing ? Folder icon showed up!.
My sister's laptop's warranty is expired so I wonder how can I fix it without having to spend too much money on a simple troubleshooting tip.
How can I download/create a boot-up Disk/Flash Drive so I can reset it to factory settings?
I cannot access the laptop because It's kind-of software bricked if you ask me. Also, I do not know how to check the Mac OS version outside of the "About Mac" menu. I do have another Mac which is a desktop computer with a CD drive.
I would appreciate some expertise on this issue a.s.a.p. Thank you!

Ok, now I am stuck:
Why does my Mac boot its OS from the Flash Drive instead of the INTERNAL HARD DRIVE???a
   If I start up my MacBook Pro, It will have the flashing question mark folder UNLESS i plug in the OS-Boot flash drive. When I at the desktop screen and work on a program, When I unplug the Flash drive, THE OS WILL CRASH AS IF I TOOK it's soul (OS x Lion) out of the body (MacBook Pro Laptop)
this is frustrating because when I did the INTERNET RECOVERY, When I install OS x Lion, the Flash Drive only show up as an option as opposed to the HDD.
I cannot format the hard-drive in DISK UTILITY because it's grayed out. This is just frustating. I never had problems with PC Windows OS recovery but this (Mac OS).

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