Firstly, the User Guide is your friend.
Secondly, Parallels loads the Parallels Tools cd image into the virtual machine when it's the first time you boot it with the OS installed and since auto run is normally default in XP it will pop the Parallels Tools installation once you are logged in, this cd image, Parallels Tools, is just a cd with drivers for video, sound, etc. So it installs like any other driver installer does, there's nothing 'magic' about it.
Thirdly, for SP3, and before you install SP3, you have to upgrade Parallels to build 5608, since you have a license to 5584, the upgrade is free, download it from the trial page (the installer is the same, trial or non trial).
Now the tricky part, it would've been simpler if you had used the latest version (5608) from the start, to safely upgrade you should uninstall 5584 first, which means you should also uninstall the Parallels Tools from the VM (via Add/Remove) and after installing 5608 on the Mac you should then install Parallels Tools (5608).
When you uninstall Parallels it doesn't delete your VMs.
Edit: Consider upgrading your RAM, 512 MB to share between OSX and XP is barely enough, it will improve your performance greatly if you have at least 1 GB (512 to each OS). And RAM is cheap anyway.
Last edited: Jul 14, 2008