Unable to install Lion - S.M.A.R.T. errors on my hard drive???

Unable to install Lion on a 27 inch 3.06 Intel Core 2 Duo iMac running OS 10.6.8.  When I am presented with install options, my HD option is dimmed and there is a message: "This disk has S.M.A.R.T. errors.  This disk has a hardware problem that can't be repaired.  Back up as much of the data as possible and replace the disk."
I have not had ANY problems with this iMac since purchasing it and other than being unable to install Lion it seems to be working just fine, and yet now I'm told that my hard drive is unrepairable.
Is this a glitch in the Lion Installer or should I be more concerned?
Any info appreciated... now it seems I've paid $30 for a download I can't use.  Grrrrrr....

Check it via Disk Utility (in your Applications/Utilities folder) on Snow Leopard:
If that says there's a problem, too, there's likely a problem. 
Be sure your backups are up-to-date, and let Apple have a look at it: http://www.apple.com/retail/geniusbar/

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