The message is correct because Lion and FCE are not supported together.
See if this sheds some light:
Just thought of something - Wasn't Snow Leopard earlier than Liion? I just upgraded OS X 10.4.11 (Tiger) to OS X 10.7.5 (Some kind of Lion.).
If I downgraded partway back, are you saying that I could install my FCE 3.5 onto Snow Leopard?
10.6.8 was the last OS that supported FCE.
If editing is your NO.1 priority I'd probably use an OS that is supported.
10.5 or 6 would be the sweet spot for FCE. Tiger is getting into the maybe category.
The newer Lion and Mountain Lion is best for FCP X.
You can't easily move your stuff to FCP X. Anything is possible though.
I'd go to 10.6 Snow Leopard as you can update to 10.6.8 that gives you the App Store for all the newer applications (purchasing) while being backward compatible for FCE.
FCP X does not use AIC for HD stuff so you'd be up for converting.
FCP X is sort of all in or don't bother IMO.
Personally I had a computer dedicated to the newer Lions with FCP X loaded and used that to learn and see how it operated in my real editing world. With the newer FCP X.06 update (lots of changesthat sold me) I made the decision to jump to it and leave the FCE/Pro behind.
Eventually we all need to make a decision to go with change, it's a matter of when.