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Both Fusion and Parallels (I will refer to both of them, collectively, as "VM" for Virtual Machine software) can install two flavors of Windows in three ways.
First the flavors. You can install Vista or WinXP/SP2. In fact, you can also install any other Windows flavor, back to Win 3.1.1, but the support and drivers aren't quite as good and you can't run in Coherence/Cohesion mode on your Mac. In fact, both packages can run many other OSs, too. But this is about the mainstream versions of Windows.
Next, the three ways to install:
Method One: Install VM and then open it and install Windows directly. You will need to activate Windows when you do this. Windows is installed on a virtual hard drive and uses all virtual hardware. There is no Boot Camp partition. Any software you install is installed on that same virtual hard drive. Since it is, at its core, a giant Mac file, Time Machine backs it up.
Method Two: Install VM. The open it and import an exact copy of another Windows installation available across your network. Let's say you have a Windows machine and just moved over to the Mac. You want to keep the Windows going for now for whatever reason. Under VM, you can import the entire machine and run it on your Mac. As in Method One, you will end up with a giant file that is your Windows. If you have a lot of software on the Windows machine you import, you will have a REALLY, REALLY BIG fie on your Mac. Once imported, like Method One, Time Machine will back you up. Once imported and running, you can also install new software. But since this is not connected to the machine that was your source for this Windows installation, any new software exists only in that giant file on your Mac. Lastly, this method will require a Windows activation.
Method Three: Install Windows under Bootcamp. Then install VM and use the Bootcamp Windows installation. As with all other methods, you will have to activate Windows again, even though you may have just activated it under Bootcamp; to Windows, this is a new install. The difference with this version is that Windows actually exists on your machine all by itself. It *is* the Bootcamp partition, not a virtual hard drive. It has direct access to your Mac's hardware. When you install new software, it is being installed on your actual hard drive, not a virtual hard drive.
I have tried both Fusion and Parallels and tried all three Windows install types on each. I am currently running **only** my Bootcamp install under Parallels. I blew away all other installs and am not using Fusion. This one instance of Windows is serving me very well. I use it often, sometimes many times a day, usually with AutoCAD and a companion program. I always have it open in a "Spaces" window.
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