I don't think it's the problem but it would be better to assign more memory to VM. Especially if you're running an antivirus on the VM too. You do have some to spare.
Be sure XP is up to date. Five just came through today and a bunch last week. Also be sure your Windows 7 is up to date.
Will any of Windows XP programs run? (Internet Explorer, Notepad, Wordpad, Windows Explorer, etc.)
Do you have a known good music CD that you can play using the XP Media Player?
Added: Also, please list the "specific" error message(s) you are seeing.