My success story - 170GB VM from my old MBP
Success! I thought I'd post my story, in case it helps someone else. I won't bother with the three days of failure I incurred - I'll just explain what finally worked. Hopefully I'll remember all the details correctly.
I'm running PD 8.0.18354 on OS/X 10.8.2. I put the disk image (about 170GB) of my old MacBook Pro ("Late 2008") into a new VM on my new iMac 21" with the 1TB Fusion Hard Drive and 16GB RAM. (I'm not bragging - just the details in case they help anyone... OK, well, maybe I'm bragging a little, because this new iMac is sweeeeet!) ;p
Here's what I did:
1) Following the instructions in this thread, I created a new, empty disk image on a USB hard drive large enough to hold the contents of my old MacBook Pro (170GB). Quoting joevt:
Run Disk Utility, create a read/write disk image, Mac OS Extended (Journaled), Single partition - GUID Partition Map, with a size big enough to hold you Lion installation. Mount the disk image.
2) I used the trial edition of Carbon Copy Cloner (CCC) (see NOTE at the end of this post) to copy the entire image of my MacBook Pro (MBP) into the image on my external drive. CCC has the ability to create images itself, but they don't have the correct configuration (although to be honest, I didn't try it).
3) I created a new VM on my iMac. I'm not sure what's the best way to do this, but I had it create a new one from the Mountain Lion Install image, then just forced it to stop once it booted up and ML started to install.
4) In the Configuration dialog for this new VM, in the Hardware section, I clicked the "-" button in the bottom left to remove the old hard drive. Told it to move it to the trash (which I then emptied).
5) I closed the Configuration dialog, and closed Parallels. Then I copied the image from my USB drive into the package for the new VM. (In Finder, use shift+right-click->view package contents.) I renamed the extension from .dmg to .hdd.
6) I started Parallels up again, and went back to the configuration for the new VM. In the hardware section, I clicked the "+" button in the bottom left and added a new hard drive from an existing image, and selected the .hdd file I just put in the package. Parallels warned me about the fact it needed to convert the image, and it is irreversible, yada yada, and I told it to go ahead.
7) Closed the Config dialog, and started the VM. Unbelievably, no smoke came out of my computer, and the VM actually booted and showed me the desktop from my old MBP!
8) I shut it down, and went through the process of converting it to an expanding disk. WARNING: This takes a LOT of disk space. To do this, I went back to the hardware configuration and clicked the "edit" button for the hard drive. I *think* it displayed that bogus error dialog about not being able to read the hard drive, but I could be wrong. In any case, I changed it to an expanding disk. This took quite a while - in fact, I wrote this entire post while it was working, then had breakfast, and answered some trouble tickets from work. But eventually it finished.
9) Started the VM back up and everything ran just fine. I'll report back if I run into any issues, but so far, so good.
Thanks to all who helped, especially joevt, without whom I would still be banging my head against the wall.
NOTE on Carbon Copy Cloner (CCC):
At the time of this writing, I couldn't get the "Mountain Lion" version of CCC to work on my MacBook Pro, without some finagling. It appeared to install just fine, but nothing happened when I tried to launch the app. Following the instructions in a post on their forum, I actually had to download the Snow Leopard version and install it. When it runs, it tells you there's a newer version and wants to take you to the website. Ignore that dialog. Another dialog comes up that will update CCC to the new version for you. Let it install the update. For whatever reason, this works whereas just downloading the ML version didn't. Go figure.
NOTE to the Parallels team, should you read this:
Obviously it would be nice if this was an easier process. But until that time comes, you should consider making a KB article out of this process. Obviously you'll want to test these steps to make sure I didn't misremember something, and you may have a better option than using Carbon Copy Cloner (although it's a great product, in spite of the installation issues I faced).
Dan