I have a portable, external hard drive that I use with Windows. It used to work fine with Parallels 3.0. It still works fine with Bootcamp and Fusion. With Parallels 4.0, when I plug it in, a window pops up and asks if I want to use it with my Mac or my Virtual Machine (Win XP Pro). I select "Virtual Machine." The "Devices" menu item lists my external USB drive as if it were connected. The USB controller icon in the tray lists it also. However, no drive is shown under "My Computer" and I don't get than normal Autoplay scan that I always see when I plug in an external USB drive.
Good news! After some experimenting, I was able to get my external USB drive to work. Here is what I did. 1) Go into Device Manager. You can do this by right-clicking "My Computer", selecting "Properties", selecting "Hardware" tab and clicking on "Device Manager." 2) Open "Universal Serial Bus controllers" (by clicking on the '+' sign). 3) You will see "Universal Serial Bus (USB) Controller". Actually, I saw two of these -- and they each had a red 'X' on them. Your hardware may be different. 4) Right-click on "Universal Serial Bus (USB) Controller" and select "Update driver..." 5) Allow the driver to be updated and Bingo! -- the external USB drive now works. 6) Repeat steps 4 and 5 for any more red-X'ed "Universal Serial Bus (USB) Controller" entries.