Lets say that a friend of mine downloaded Windows XP professional off of bittorrent and he or she wants to run it in Parallels, how would my friend install the disk image to parallels?
Hypothetically speaking when going through the add virtual machine wizard or whatever you want to call it near the end there is the option to specify where to look for the installer file either on CD/DVD or disk image. Select the disk image option and hypothetically browse to the hypothetical file and follow the procedure to the end. Parallels will then hypothetically use the hypothetical image to hypothetically install the hypothetical version of windows.
Hypothetically speaking, this would be pirated software, so we can't permit discussion of how to go about doing what you've suggested. Hypothetically speaking, of course.