After installing the recently released "windows desktop search 3.0" on xp (everything else up to date), using build 3170 / rc3, parallels would periodically throw up an osx dialog box complaining to the effect of "unable to set screen resolution, please increase video memory within the vm". increased the video memory to the max allowable (32 mb for me), but still received the error. Then increased memory allocated to the vm but that didn't help either (not surprising). Finally removed "windows desktop search 3.0", and the video memory problem was gone. I'm running on a 15" mbpro2 with 2 gb physical memory. This hapenned whenever attempting to resize the vm window to more than about 3/4 of the physcal screen (whether in os window, coherence, or full screen mode). - Bob
one more thing .. using office 2007, which is where the prompt to load the desktop search feature actually originates.
I ran into the almost exact same problem, however, I did not have "windows desktop search 3.0". I reloaded Parallels Tools and so far that has fixed the problem.