Found a fix for this
Trying to upgrade, or rather replace my Windows XP 32 bit in Parallels 6 with Windows 7 64 bit.
Could not get Windows XP to see the contents of the install DVD, instead it showed it as a Network Drive, but I couldn't set that up as a boot device.
In the VM configuration menu I saw that I had 2 different DVD drives, Matshita DVD-R UJ-898 and also UJ-895. I changed the selected model to UJ-898 and almost immediately after saving the settings a not popped up to tell me that the installer I was using was not compatible with the XP 32 bit OS.
I changed the boot order to start with DVD. Now it said attempting to boot from DVD, press any key to boot from DVD, but it would then go on to boot into XP anyway.
I saw in one of the much earlier posts that someone recommended also changing the bios. I hit the F2 key on restart and it went into the very limited BIOS (I think that's what it was) that gave me 2 options: Windows Setup and Windows memory configuration. When I chose Windows Setup it booted from the DVD and installed Windows 7 (or rather it started to, it hasn't finished yet).
In case anyone was wondering, you can not select Upgrade when installing Windows 7 64 bit over Windows XP 32 bit, it wont work because the installer isn't recognized by XP.