Some facts:
* Although PDM 5 doesn't work on Lion (and PDM 7 does) it doesn't prevent in any way Lion installation, Lion installation should run smoothly with PDM 5 installed, although it's convenient to upgrade to 7 before upgrading to Lion but because PDM 5 will simply not work in Lion.
* I have no idea what the expression "virtual system incompatibility" means, it doesn't have to be related to Parallels just because it has the word 'virtual' in it. If I google for that exact expression the only result is this thread. To the best of my knowledge that expression meaningless/vague.
* If you have a Bootcamp partition with Windows installed on it (used or not in Parallels) and this partition for some reason not correctly identified by Lion (for instance, the partition layout was altered by another tool besides Bootcamp Assistant.app), you might lose access to it, but again, it shouldn't prevent Lion from being installed
* The 'No Recovery' error means Lion can't create the so called 'Recovery Partition', this is not related to Parallels directly, it might be related to an existing bootcamp partition. This can happen for a variety of reasons including lack of space on the drive.
* This thread on another forum might help you: http://www.mac-forums.com/forums/os-x-operating-system/245192-installing-lion-no-recovery-error.html
* According to that thread I suggest you first try to unmount the Bootcamp partition (if you have any) before attempting to install Lion.
Last edited: Dec 24, 2011