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I just upgraded to Snow Leopard. Parallels Desktop 3.0 does not work anymore. OK, solution is to upgrade to 4.0. (grumblings of upgrade price, but not the issue at the moment).
The problem is that I left my virtual machine "suspended" and not "shutdown", as I always do.
Now, when I run the upgrade procedure, it tells me to "Shutdown these running and suspended virtual machines: Windows XP". WELL, I CANT!! I can't start Parallels 3.0 to shut it down.
Had the same *issue* myself. Called tech support and they told me how to fix it (for free):
1. Go into ~/Documents/Parallels/Microsoft Windows XP
2. Delete 'Microsoft Windows XP.mem' and 'Microsoft Windows XP.sav'. These two files control the state and session settings. They are only created when you suspend or save a session, so by deleting them, you reset the virtual machine.
3. Upgrade to Parallels 4. When you start Parallels, it should now convert the XP virtual machine properly.