I'm a n00b at Parallels myself and got the same errors that you seem to have gotten this weekend.
I eventually canceled out of the dialog box and the install continued without any additional problems. Once it was finished I was able to install office and it seems to be running OK. I'm not pushing the XP partition to any degree, ActiveX/DirectX/Games... etc so maybe I haven't hit the errors yet. But so far it works !!