Installing Windows 7 on Parallels with external DVD Drive

Hi. I have a Mac Mini, and just finished installing Parallels 8. I am now trying to install Windows 7, but they system is not recognizing my external DVD drive. I get a message telling me to install from an image file? Not sure what that means. Help! Thx.

I am doing this after doing a full wipe of my hard drive and reinstalling lion.
Previously, I had lion, and made a partition using disk utility and booted from the disk (this time it was from my Mac's SuperDrive which was functioning perfectly at this point in time) and finished the installation completely fine. I then used the drivers that were in my Snow Leopard DVD (I have a Snow Leopard DVD from a previous Mac I purchased).
The only difference between then and now is that I am using an external DVD drive.

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