Same issue here, too. It was kicked off by a power outage while I was working in fullscreen mode.
Changing the Parallels app's prefs about allowing it to change resolutions did nothing. Changing the display resolution in Windows XP full-screen mode didn't help, as Parallels would resize the window to 1280x1024 immediately upon reentering windowed mode (exiting fullscreen mode).
What worked was to change the Windows XP display resolution in windowed mode. The trick is that the start button is off the bottom of the screen when the window is too large, making it impossible to open the Display control panel that way.
The workaround is to right-click on the desktop background and click "Properties." This is an alternate way of bringing up the Windows XP Display control panel. Go to "settings" and change the resolution to 800x600. Parallels will then "remember" that this is your preferred resolution for windowed mode.
This was annoying, because it's basically a 'hidden pref'. I consider it a bug; the hidden pref should be made explicit somewhere in the Parallels preferences menus.
Last edited: Aug 16, 2006