Can't install Windows XP Upgrade - Can't format partition error

I am having great difficulty installing Windows XP SP 2 retail on either of my two Macs. I just bought Parallels 5.0 and am running 10.6 on both Macs. I start with the upgrade media, which then prompts me to insert my previous OS disc (which doesn't seem to matter as I have tried both Win2K and XP Professional), then on the next step where it goes to format my Parallels virtual disc it takes a few seconds and fails. The error is "Setup was unable to format the partition. The disk may be damaged.

I have tried erasing the partition and creating a new one, tried on both of my Macs and even giving Parallels more memory (3GB) as suggested on another forum as the solution... however to no avail.

Any suggestions?

Thanks in advance!

 

Still not further along on this issue. Perhaps let me ask a broader question. Has anyone successfully installed an upgrade install of any version of Windows via Parallels?