You can work with the one unpartitioned space as-is, and when you get to the next screen I recommend you choose NTFS rather than FAT so that you have a higher performance Windows virtual machine. Note, however, that FAT is the file system that Mac OS X can more easily navigate if you want to actually access files within the Parallels virtual partition.

Somehow, "exciting new look" probably isn't intended to refer to the fact that we're installing Windows XP within the Mac OS X environment, but it's amusing nonetheless, isn't it?

At this point you'll go through some rudimentary Windows XP configuration questions, about language, region, and related. Finally, you'll hit the second of the legal interludes in this process:

If you don't have a valid product key for Windows XP (or whatever OS you're installing) you'll be stuck here, though you can try running for the 30 days allowed before you have to register your OS product.

A few more simple configuration options about timezone, current date and time, and you're finally into the installation phase of Windows XP, which can take anywhere from 30 minutes to a few hours. I don't have the patience to time it, so I'm not sure. Instead, it's a great time for a chai break at Starbucks :-)

When I come back, Windows is mostly installed and it's just a matter of specifying a few more configuration changes. One thing that happens is that the virtual machine reboots itself and then automatically adjusts the screen resolution to escape the 640x480 hell that we were confined to for the initial installation process. Now we get a glorious Windows logo and boot screen within Parallels Desktop itself: