None of my USB enclosures work with SMART unfortunately.

With regards to the upgrade path... If you want an upgrade install, follow the advice I mentioned first, which is do the restore and verify the system is working (as it was on the older OS) before the update to 10.7.

If you want a clean install, then do the 10.7 install and then just migrate your apps and data/settings from the Time Machine backup using the migration assistant and some manual copying where necessary.

If the system isn't booting properly I'm not sure what the next steps are that you should take. Try all the obvious first round stuff like clearing PRAM and maybe last resort reset the SMC.

Hopefully Tom will read this and have additional advice about that system.