Here is what Parallels Support recommended. The first set of instructions worked for me. YMMV.
1. Launch Parallels Desktop => do not start the Virtual machine.
2. Click on the "Window" option on the top menu bar => click on Virtual machine list.
3. Right click (ctrl+click) on the "Windows XP" => click on Configure => hardware tab => select "boot order".
4. Now, to the right pane you will have an option (a box) "boot flag", please add the following boot flag:
devices.hdd.error = 1
5. Click OK.
(Please perform these steps on both Virtual Machine that is Windows XP and 7)
Please refer the below given link to get to the boot order:
http://download.parallels.com/desktop/v6/docs/en/Parallels_Desktop_Users_Guide/22237.htm
If the issue persists then please perform the below given steps:
Step 1:
1. Please click on the link given and uninstall parallels desktop completely:
http://kb.parallels.com/9087
Step 2:
1. After the uninstall, open Finder => Applications => Utilities => Disk utilities.
2. Select Macintosh HD => click on repair disk permissions.
3. Please wait till the repair completes.
Step 3:
1. Now, please download the .dmg file to Install Parallels Desktop from the below given link:
http://www.parallels.com/download/desktop/
(select the language of parallels desktop you are using and click on download now=> .dmg file will be sent to your mail account => click on the first link in the mail and the file will start downloading)
2 .Once the file is downloaded, it will get mounted on the Mac screen => click on Install and proceed with the onscreen instructions to install parallels desktop.
Click to expand...