Thanks Stacey, but as I mentioned previously, I tried that 2 times already.
I finally got it working, and this is what I had to do (stay with me here all you that have the same issue, as this will work!).
You must use Acronis Software (
http://www.acronis.com/ ) to create an image of the drive and use that image to restore to a newly created VM machine.
1. Start by booting the VM and installing Acronis onto the machine.
2. Next, create an emergency boot disk from that install.
3. Now restart the VM and boot from the emergency disk.
4. Under the options, choose to create an image of your C:\ drive.
5. Store the image somewhere on your mac.
6. Now, create a new VM with Parallels. I created a 100GB Fixed (non-expanding) hard drive. In my case I also installed Windows onto the new VM up to service pack 1 since I couldn't get the VM to boot from the disk without a system installed. It seemed to always want to boot into windows (bypassing my "boot from CD" option each time). After windows was installed, I could get it to boot from the CD.
7. Now add a new, second hard drive to the VM in the parallels VM configure window. Make the new drive large enough to fit the newly created Acronis disk image.
8. Either use the parallels Transporter to copy the image to the newly created second disk drive on the new VM, or boot the VM into windows and copy the image file from your mac onto your new disk drive.
9. Reboot the VM and boot from the Acronis Emergency Disk again.
10. Select to restore an image, and twirl down the new hard drive (likely now D, E or F:\)
11. Select the image that resides on that drive as the image you wan to restore.
12. Opt to replace the C:\ drive entirely. Say yes, yes, yes, yes, I know.
13. Wait until it's done
14. Reboot and voila! you have your old machine on a newly created 100GB drive.
15. You can now delete the additional drive with the image on it.
Good luck!
Joel