After spending a full day trying to get Parallels to load Windows XP from a disk that simply didn't want to boot, I found an old Windows XP reinstall disk from a laptop I no longer use. This disc was at least recognized by Parallels - and starts the install process, but then when it gets to the point where it reboots after copying all the system files - it starts over at the beginning!!! Any idea as why it is doing this? I only have 512 RAM, which I've already read can cause issues (I'm going to go buy 2GB today) - but I'm thinking there must be some other reason?
I don't think that system restore disks work with Parallels. Try making a disk image (.iso file) of your original Windows XP disk and install from there. There's instructions for this in the manual.
