Yes it would look normal but as long as you boot from Iomega you can erase the internal, you can erase a drive your currently booted on
What the heck are you talking about? You can NEVER erase the drive you're currently booted from, apart from certain nefarious terminal commands.
OP, you're going about this all wrong. First, tell us what you're trying to accomplish by erasing your internal HDD. Are you trying to reinstall the OS? Are you going to sell it? This will help us figure out exactly how to help you.
Basically, you're trying to restore an install image to your internal drive. Why? If you're trying to reinstall Lion, that's not going to let you do it. If you want to erase your computer and reinstall Lion, you need to boot from your recovery partition, erase your main partition, and have it reinstall Lion. Alternatively, you could restore the InstallESD.dmg to your Iomega drive (right now, it sounds like you simply have the file on your Iomega drive, which the Mac won't be able to boot from). Note that doing so will erase any data you currently have on your Iomega drive.
Let us know what you're trying to accomplish and we'll be able to help you out much better.
As to why it looks normal, the solution is that your Mac is trying to boot from the Iomega drive, failing, and then booting from the internal drive. This is why the internal drive is at the top of the list in Disk Utility (your boot drive always is first) and your Iomega drive is listed later. You can see where, towards the bottom of the window, it says "Mount Point: /" Only the boot drive can have that mount point.