"Well, I tried again following your steps and still when 3186 boots into my XP Pro SP2 VM, it freezes about 30 seconds after it gets fully booted. I can boot into Safe mode. I've removed everything that was autostarting: Zone Alarm, AVG virus protection and TiVo Desktop. I also uninstalled Parallels Tools from the control panel. Now it only freezes when I click on Install Parallels Tools option."
Sounds like there is an incompatible service running inside Windows. If you have the original Windows XP SP2 disk, create a new drive image and install the Parallels Tools. If that works, it just means there is for sure something within your Windows install the is conflicting with Parallels.
What I would recommend, is to create the new image and do your tools install. Then, shutdown Windows, quit Parallels, then make an archive of your drive image and call it something like BaseLine_1.zip.
Restart Parallels, and load some of your software. Quit Windows, then restart the VM and be sure everthing still works. If so, shutdown Windows again, quit Parallels, then make antoher archive of your drive image and call it BaseLine_2.zip. At this point, you can always dump the first archive you made.
Repeat this process until something screws up. This will help you to figure out was is causing the conflict and, by having the archives to go back to, will save you time from having to do a full install all over again.
I don't know of any other way to isolate the problem.
