I'm trying to do the same thing, and am getting the same "missing operating system" error. Thank goodness it didn't wipe my Windows drive or delete anything when I tried to install it! I about had a heart attack when it said "missing operating system"! I've read that running Windows off of a separate internal drive should be possible with VMware Fusion, but do we know if this is possible with Parallels? I'd hope so, but you never know. Luckily I'm testing out the trial version, as well.
I'm running an evaluation copy of Parallels 7 on my MacBook Air and have tried migrating Windows XP. I have the same "missing operating system" when I start the VM. Sorry if this sounds like a dumb question, but does Parallels copy the OS, applications and data or just applications and data??