I tired converting my existing PD3 Windows XP install yesterday. Let it run for 24 hours and nothing. I canceled that and started a clean install almost 2 hours ago and it has been at the same point for at least 90 minutes of that.
It looks like the issue is been caused by Parallels Desktop being unable to create a configuration file on your hard disk. This may be caused by either lack of space or insufficient user permissions. Please make sure you are trying to create your Virtual Machine logged in as the administrator. If you are an admin and have enough space on your hard drive I would recommend you to submit a ticket with our technical support department so that they may assist you further. To submit a ticket please follow this link: http://www.parallels.com/support/desktop/request/