10.7.5 host and fusion 5.0.2 can't boot or update lion guest

I'm trying to upgrade a 10.7.x VM guest to 10.8.2 using the InstallESD.dmg from the Mac App Store.

My host OS is 10.7.5 and I'm using Fusion 5.0.2.

I've tried upgrading several times, but after installation completes I get the message shown in the attached screenshot.

I changed the OS from Lion to Mountain Lion in the VM settings, but it had no effect!

I also tried creating a new VM and booting from the InstallESD.dmg, but the VM won't boot. I get the circle with a cross through it.

Why can't I create a new 10.8 VM or upgrade an existing 10.7 VM?

Thanks