Well speaking personally the menu tools update has not worked for me in a single release of Parallels, not one.
HOWEVER it is very easy to fix.
Click on the CD icon and connect image.
In the Finder window that comes up go to:-
Library, Parallels, Tools and select the VMTools.iso file.
From Windows you can then go Start, My Computer, VMTools and it will install.
I have had to do this with every release.........
Robin