I also just upgraded from Parallels 4 to 5, and have what looks to be the same problem with my Windows XP image. I think I see the same error message, but it goes by so fast to the next screen which is quite verbose, but starts with "We apologize ... but Windows did not start successfully ... Then near the bottom is the highlighted "Start Windows Normally", and after 30 seconds the whole process starts again, the error window comes back, and again it tries to start normally after 30 seconds. After watching this recycling about 4 times, I tried "Safe Mode" but even that eventually came back to the endless recycling.
Then I tried a "Revert to Snapshot" and for a moment I saw the normal Windows screen with icons and all. But then that disappeared and I saw the usual small black background window which went into the same endless recycling.
Parallels 5, you have a problem with a Windows XP image.
Bob