iMac stuck in recovery HD mode

Hi all,

I have a iMac 24" 2.8 GHz (EMC No. 2211). Got it cheap from a friend of a friend and the issue I have with it is that it is stuck in Recovery HD mode. It is running 10.7 Lion. I can't simply re-download the OS because I have not purchased it and it seems I can't anymore on the App Store. What I do have is a bootable USB 10.8 Mountain Lion installer and I would like to install that but I am having difficulties doing so. I understand that holding down OPTION during booting will take the computer to Start Up Disk but it shows empty.

What are my options?

Thank you.