Installing Parrallels 3.0 as an Upgrade???

I know I am a computer dummy; now I guess I'm a chicken, too.
I have a version of Parallels installed on my MacBook Pro using the Tiger OS. No idea what version of Parallels it is as it appears nowhere that I can find, but it was purchased in January, 2007.
I have received my upgrade CD but am confused about installing it. The manual (pg. 19) says to upgrade "locate the downloaded .DMG file", then "double-click the .DMG to mount and open it." I have no idea what or where the ".DMG" file is so I can't follow that instruction.
If I insert the CD and open it and open the install file it asks me whether I want to install the program on my main Macintosh HD or the "Parallels HD" which shows up beside the Mac HD icon. I don't seem to think this is the way to just upgrade my existing program without losing the Windows XP operating system and all the other files I have already installed.
Is there a better way of describing how to just upgrade to 3.0 without losing everything already on the computer??

 

Version Info: Run Parallels on your Mac and in the Parallels menu item at the top of the screen click on About and it will give the version and build number.

The program should install on your Mac HD, since it runs in OS X; if you look in your Apps folder you will find a Parallels folder with the Parallels app in it. I'm surprised it even gives you the option to install on the Parallels HD.

That said, sometimes being a chicken is the wisest course

Phil