Now, this is how I got XP SP3 installed and working:
1) Boot the machine to XP on the Boot Camp partition.
2) Install Boot Camp 2.1 from Apple. The URL is:
http://www.apple.com/support/downloads/bootcampupdate21forwindowsxp.html
This is essential *before* installing SP3.
2a) Reboot.
3) Install SP3. I downloaded the full install from Microsoft.
3a) Reboot.
4) Select your OS X partition as your Startup Disk and
4a) Reboot.
5) Once OS X boots and you are logged in, start Parallels, but *DO NOT*
start the VM!
6) Open your VM configuration, and select 'Hard Disk -> Advanced'
7) Click on the "Clear..." button under the "Cleanup Boot Camp partition"
section. This allows Parallels to 'learn' about the changes made by the SP3
install.
8) Start your VM.
9) Once the VM is started and logged in, *RE-INSTALL* the Parallels Tools!
9a) Reboot the VM.
Worked for me, anyway!
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