Windows XP SP3 Security Update Kills Parallels Virtual Machine Image

I am running Parallels Desktop for Mac, Version 3.0 Build 5608.0 in Mac OS X 10.4.11, on an Aluminum iMac C2D 2.8Ghz with 4 Gig RAM and a 1T HD.
My virtual machine is a very dependable (until now) Windows XP Pro SP3 installed in a normal Parallels disk image, with nothing but MS Office installed.

I'm having a very specific problem with the virtual machine:

Parallels launches just fine, but when I start the virtual machine, it stays as a little black startup screen (just before the Windows XP image is supposed to come up) and it stalls indefinitely. A manual "reset" of the virtual machine forces it to restart, and Windows gives me a "your computer didn't start successfully" screen with the normal options to start is "Safe Mode" etc. None of the options to continue starting from that point work.

After literally 16 restorations from a backup of my disk image (via retrospect) I have figured out that Windows may be to blame. The virtual machine gives me absolutely no problems, starting just fine, until I install the Security Update for Windows XP (KB956841) update in the virtual machine. (Believe me, I installed all the latest mess of updates, and had to restore the disk image 16 times to figure out which one was causing this)
If I just "restart" Windows in the virtual machine, it restarts just fine each time after the update. But, if I actually "Shut Down" the virtual machine, it won't start back up again until I revert back to the non-updated disk image. I updated Windows with all its security updates to date, except this one (now) because it kills the Parallels capability thereafter.

I even tried not shutting down the virtual machine after the update, and uninstalling and reinstalling the Parallels tools to see if the update was somehow messing up the Parallels tools -- no dice. As a matter of fact, if I run the update, the Parallels tools cannot be installed or uninstalled immediately afterward! I did a little more research and found that the device manager reports that the DVD hardware (virtual) no longer is working correctly after the update as well. Again, a restore back to a previous disk image gets it all up again. It seems this update may be hosing the Parallels drivers in Windows somehow?

Anyway, I cannot install the security update in my virtual machine until someone finds a workaround or a fix. Please help. A screenshot of the offending Windows Update information is attached.

 

I lost my CD (see http://forum.parallels.com/showthread.php?p=126638&posted=1#post126638 ). I loaded an earlier Windows XP image backup dated 9/13/08. In that image my CD worked. So I proceeded to run Windows Update and one of the updates listed was Security Update KB956841. I wanted to isolate the problem to this update, so I installed all the updates except KB956841. I rebooted my system multiple times to make sure that my CD continued working. Then I installed KB956841 and rebooted. Fortunately/Un-Fortunately after multiple reboots, with KB956841 installed, my CD has continued to work.