Fornia, I had the same problem with my weber lid. I just flatted out the lip on my lid and it sits flat on my drum now. It's not air tight, but it's far enough away from the fire that it doesn't really matter.
I should note that my weber lid is from an old useless OTS, so I didn't mind flattening the lip and donating the lid to my UDS permanently.
As far as your paint issues...I'd say you should see what a good hot fire does to that paint before you start getting quotes on sandblasting. Then again, if a hot fire doesn't get rid of all that paint, I doubt that 250 degrees of BBQ temperature will disturb it either. I know that there are some in this thread who are cooking on drums that still have paint inside of them, the paint just happens to be under a nice layer of grease at this point.