Those rectangles indicate either a problem with video driver or a problem with video memory
Can you please:
1. Go to Virtual Machine->Configure->Video->adjust video memory to 32 MB.
2. Run Parallels Explorer from Applications->Parallels Explorer
3. Point it to your VM's HDD.
4. Open a boot.ini file on your HDD's C:\ partition root.
5. Find a string that looks like
Code:
multi(0)disk(0)rdisk(0)partition(1)\WINDOWS="Microsoft Windows XP Professional" /noexecute=optin /fastdetect
6. Append a "/basevideo /noguiboot" flags to it so that it looks like
Code:
multi(0)disk(0)rdisk(0)partition(1)\WINDOWS="Microsoft Windows XP Professional" /noexecute=optin /fastdetect /basevideo /noguiboot
7. Close Parallels Explorer and re-attempt the upgrade.
Please let us know the results.