Ok got it working. For some reason the installer on OS X made the owner/group 501/admin.
I did this at terminal to make it work:
sudo chown <my_user_name>:<my_user_group> Parallels-VM-Compactor
Then it activated. I ran Windows XP w/ the ISO and during booting my machine rebooted...not the VM, it never got into XP, but my MacbookPro rebooted, no kernel panic, just a hard boot.
I reboot and load up XP and it looks fine, try to run the ISO and it tells me it's not activated. So I look in the Parallels-VM-Compactor folder and again, all the files inside are owned by 501:admin. So I disconnect the virtual CD in XP, shut down Parallels and chown those files
cd /Applications/Parallels-VM-Compactor
sudo chown <my_user_name>:<my_user_group> *
Then I run the activator and reboot XP and it all works.