Problem with Mac OS X Lion reinstall - Cannot install on server volume

I have a MacbookPro 2011 that has been upgraded to Lion from Snow Leopard. I can log on and use the computer but I want to reinstall Lion and make a clean start. I have created a rcovery partition on an external drive and booted to this partition using the option command when re-booting. The Lion install process goes well until the screen which asks you to select the disk where you want to install Mac OS X Lion. The Macintosh HD drive is there, but I cannot select it as I get the following message with it:
You cannot install Mac OS X on a server volume. You need to use disk utility to erase this volume before you can continue to install Mac OS X.
I have no idea why the install is seeing my hard drive as a server volume. I just want to install OS X Lion, preferably using the archive and install option, on a standard MacbookPro. If I go ahead and erase the HD  will I still be able to install Lion? How will Apple know that I have already paid for the Lion upgrade if the main HD is erased? I have already created a clone of the existing HD so I have a backup of all files I need.

Slight Update. I found a guy with my EXACT problem here.  Go to this discussion for further details.

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