Cannot Backup the VM before converting

I have purchased a new MacBookPro running 10.6 to replace a 4 year old MBP running 10.5.8 and needed to upgrade my Parallels from 3.0 to 6.0 on the new machine. I have installed 6.0 on the new machine. When I launch Parallels Desktop I get a message that says:

"The VM needs to be converted before it can be used with Parallels Desktop."

I choose "Backup and convert" and have attached three different HD's to the new MBP to backup the 29.9 gb file. Two Western Digital 500gig drives (with 50 gb and 300 gb free) and then even by Target Disc mode back to the old MBP with 330 gb free. In all three cases I get the message:

"There is no more free space for a virtual machine backup. Free some disk space or select another destination for the backup."

Huh?

The old MBP can still run Parallels 3 obviously, but what I want to do is bring all my applications and data from that Windows machine on the old Mac to the new Windows machine on the new MBP.

What should I do?

Thanks in advance.