Ok, I've made a little headway in identifying the problem. So I used the fn+f8 display option I hadn't really tried yet, and I feel really stupid for not thinking of it sooner. I think at one point in time I had this problem with a Windows installation. So here are the results for using it so far.
When I use fn+f8 while booted into Lion the box freezes and the mouse arrow disappears resulting in needing to be rebooted to regain functionality. So I tried the fn+f8 at boot up and it actually goes to the external display. I see the drive in Chameleon and boot into It. It then goes into the Apple logo with the spinning wheel and everything is fine. After that the monitor shuts off and goes into power saving mode as it moves to the Lion login screen (before it actually gets to it though). Both screens remain black at this point and I need to reboot. So I'm thinking that my problem may lie in not having the use of my FN key while in Lion. If I did I could possibly switch between displays. I'm not sure what is making the external lose its connection at the login screen though, but hey it's a step in the right direction.
So the good fight continues lol...
EDIT: It seems that the fn button is working for other options. It is only freezing when I use the fn+f8 display combo. (the mouse disappears and cannot do anything through keyboard)