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Yesterday after upgrading the boot camp drive from Win 7 RC to Win 7 (32 bit), I also got stuck in the Win 7 repair cycle when starting the newly created VM in Parallels 5 for the first time. All Win 7 updates had been applied before creating the VM.
I noticed that the VM startup seemed to think Windows failed to start when it was in fact sitting at the login screen. Once the repair process started there was no way to enter the password.
I rebooted into Win 7. The repair process was unavoidable and once it was complete my Win 7 install had been returned to a very early restore point (prior to all Windows updates, MS Office install, and 6 program installs).
I made the following changes while booted in Win 7:
- delete the password for my only user account (admin privileges).
After starting OSX and Parallels 5:
- change the Win 7 VM config to turn off all drive / folder sharing with the Mac.
Started the Win 7 VM and it started right up with no complaints.
I have since restored the Windows account password and enabled folder sharing with the Mac. Parallels and the VM can be started with no problems. Have also applied additional Windows updates, and restarts are still no problem.
Hope this works for others.