What's wrong? Too little memory (RAM) allocated for my tastes. Easily fixed, by clicking on the word "Memory", which takes you to the darn useful Configuration Editor:

Slide the control along to the recommended amount (or more, your call), and we're finally ready to roll!

Installing Windows XP, Really

The first step to actually installing an OS is to insert the Windows install CD (DVD, actually) into your computer, then push the "play" button (rightward-facing triangle) in Parallels to start up the program with the new VM system. The system will prompt for a Parallels Desktop license code (which you did remember to request, right?). Enter that, and after a minute or two, your screen will look like this as you're welcomed to the Windows XP Setup program:

This should already seem pretty cool if you're a Mac person, because this is running within Mac OS X, yeah!

Now you can step through the standard steps of a Windows XP install in fairly short order: