Windows could not start on a parallels desktop VM on a Mac (and I can't get windows repair to run)

I am running Parallels Desktop 6 on my Mac Book Pro.  I have a windows xp vm that all of a sudden is giving me the following message upon start up:

windows could not start because the following file is missing or corrupt:
\windows\system32\config\system

You can attempt to repair this file by starting windows setup using the original setup cd-rom
select 'r' at the first screen to start repair

I have inserted the xp start up disk and get into the repair screen by hitting r.  It comes up to the following prompt: (screen shot #1)

1: C:\windows
which windows installation would you like to log onto (to cancel, press ENTER):  

It won't let me arrow up to highlight the 1 or let me type in a 1.  If you notice in the screenshot, towards the bottom of the screen it says:
to select non-default keyboard layout press ENTER now (5)

I have tried hitting enter, return, alt-enter a number of combinations but I can't get a keyboard layout to come up that would then hopefully allow me to enter in the number of the windows installation I want.  I googled this and it should allow me to select a layout.  I have hooked up a PC USB keyboard to teh Mac in hopes of it working better with the VM but it behaves the same.  I hit enter and then it cancels the repair and then blue screens with a registry error.

So I need some big time advice on what to try next?  i have spent numerous hours researching this but haven't found anything that works.  Any and all advice would be appreciated!

Thanks!
John
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