Hi again forrie!
Perhaps it just wants you to run Disk First Aid on the guest hard disk (or the Run First Aid... option in Disk Utility)... have you tried doing that (from inside the guest)?
I assume you are simply trying to launch the Yosemite installer inside the VM while it is running 10.7. If so, launch Console and check /var/log/install.log to see if the log file has more details about why the target disk is not suitable. (Look for /var/log in the left pane of Console (if there is no left pane, choose View> Show Sources), then pick install.log.)
Another approach might be to try booting into the installer directly. It's a bit complicated and requires several gigabytes of free disk space on your host, but the installer has a somewhat better chance of being able to do what you want:
- In Fusion, choose to create a new VM, and supply the Install OS X Yosemite.app as the installation source by dragging and dropping it into Fusion's New VM window.
- On the next (and final) screen of the New VM procedure, instead of choosing Finish to power on the VM, choose Customize Settings. This will construct the virtual machine but will not power it on. Close the newly-created VM.
- Go back to your 10.7 VM, and go into Virtual Machine> Settings..., choose Add Device..., then Existing Hard Disk, and then navigate to the new Yosemite VM you created a moment ago, and pick its Temporary Installation Source Disk.vmdk to add to your 10.7 VM. You can choose the option to share the disk with the other VM.
- Still in the virtual machine's settings, go into General and change the OS to OS X 10.10. Make sure that the VM is configured with at least two virtual processor cores. Close the Settings window.
- Choose Virtual Machine> Power On To Firmware.
- When the EFI Boot Manager appears, choose the EFI Hard Disk option which is furthest down the list. It will probably be below the entries for Mac OS X and for the EFI Shell.
Hopefully, the virtual machine will boot into the Yosemite installer. There is a slightly higher chance that it will be able to install to your regular boot disk from in there... it depends on what the installer's objection to the disk is...
Thanks,
--
Darius