There is definitely something wrong, what you've described sounds like exactly the right steps to solve your problem, either you're doing something wrong or the disk is damaged or your Mac's optical drive isn't working.
Hold down the option key while booting your Mac, and insert the Snow Leopard install disk. It should show up after a minute (maybe you have to press "refresh"? I can't remember), and you can boot from it. Before installing, it's probably a good idea to use Disk Utility to repartition and erase your hard drive, specifically to remove the recovery partition that Lion has created for you (it will be recreated if you install Lion again later).
Failing that, you can try booting from the Snow Leopard install disk using another Mac to see if it's working, or try using someone else's install disk on your Mac. You might also try duplicating the disk on your Windows pc (using an app that does a low level/raw disk copy, not just a file copy — which will not work).
If none of that works for you, perhaps take your Snow Leopard install disk in to an Apple store or Reseller and tell them you can't get it to boot, maybe they will be willing to test the disk for you and perhaps give you a new one (for free if they're really nice).
You can also use someone else's Mac to download Lion (open the App Store on their Mac, log out of their account, log into your account, go to Purchases and click download on Lion, then log out of your account. Remember to log out of your account! otherwise they might accidentally buy apps with your credit card). Once you have the Lion install package on their Mac, right-click and Show Package Contents on it and drill through the folders until you find the InstallESD.dmg file. Use Disk Utility to copy that DMG onto a DVD or USB memory stick (use the "backup/restore" feature to copy the DMG's content onto the disk). Old Macs can't boot off a USB memory stick, but all recent ones can.
I've been told most Apple Stores are willing to do the above for you if you explain you've got a slow internet connection at home.
I called 1-800-MY-APPLE and bought Lion 10.7 for only $19. I told the automated machine that I wanted to buy OS X 10.7 Lion. I was transferred to a sales representative, and he looked it up and said it was $19.99 plus taxes. I was surprised because I was expecting a $29.99 price tag. So I made him double check to make sure it was indeed 10.7 Lion and not 10.8 Mountain Lion. He said that it was for sure and that I would be emailed a PDF with a redemption code to get it.
I went through with the purchase last night (November 6, 2012) and got the email today. I was able to redeem the code in the App Store and download it from there!
Best Answer
Since you've never purchased it from the App Store, you cannot re-download iPhoto from the App Store (unless you buy it again).
The only way you get re-download rights to iLife on the App Store is if you either purchased it from the App Store or bought a Mac that does not come with a software re-install disc.