Windows 7 VM in Parallels 8 keeps trying to repair itself on initial configuration.

Hello,

I am having some trouble with Parallels 7/8 and Windows 7. Here's the story:

Macbook Air with 10.6.8 on it and Parallels 7. It previously had a Win XP VM working just fine (had to remove to make space for the new one). I used the USB cable transfer method to transfer a new Windows 7 Desktop to set up as VM in Parallels 7. When trying to start up for the first time, it runs through step 1 of the configuration, then kicks me to a Windows screen saying the startup repair failed, do I want to restart Windows. I do this, and it starts the cycle all over again. I've gone through it at least 8 times now, but it cannot get past that point.

I decided to try upgrading to Parallels 8 to see if new functionality would help. I get the same problem, but this time I was able to go into the manual setup and see this error:

problem signature:
problem event name: StartupRepairOffline
problem signature 01: 6.1.7600.16385
" " 02: "
" " 03: unknown
" " 04: 21201042
" " 05: AutoFailover
" " 06: 3
" " 07: BadDriver
OS Version: 6.1.7600.2.0.0.256.1
Local ID: 1033

I have no idea what Driver it could be referring to .
Other things I have tried:

1. Changing the VM Disk usage from 1TB down to 84GB since the Mac only has 128GB drive.
2. Changing the VM RAM usage to 1GB.
3. Setting the VM to run 'Isolate Mac from Windows'
4. Going to the advanced settings when I get the startup failure, choosing CMD prompt, and entering: "bcdedit /set {default} bootstatuspolicy ignoreallfailures"

Basically nothing is helping. I am thinking of trying to transfer the Win7 via external hard drive instead of over the cables but I don't think that will help. I am also considering hooking up a CD drive and trying a windows repair disk if I can locate it.

Please does anyone have any ideas?