It's been a little while, and I didn't document the process (since it was working ;P ), so I can't say exactly step-by-step, but I'll try.
Created VM with 8GB "expanding" HDD, 1GB ram, "Other 2.6 linux kernel".
Started VM, inserted DVD. Might've had to reboot to get the boot to take.
Booted to the Ubuntu bootloader screen. Selected the LiveDVD environment (NOT install!)
Live environment started.
Resolution may have been 1024x768 or 800x600 at this point. (I fixed this later on)
Verified the LiveDVD environment worked by starting up a browser, playing around a bit, starting a terminal and sshing to one of my other machines, etc...
On the desktop was a launcher to install to the HDD. I don't remember the exact text, but it was pretty self-explanatory. Ran that.
Followed the instructions, pointed it at the virtual HDD, and let it do its thing. Pretty much just took defaults the whole way (installs can always be done with apt afterwards).
Once I was rebooted into the "installed" Ubuntu instance, editted /etc/X11/xorg.conf to add 1280x800. Also enabled XDMCP in /etc/X11/gdm/gdm.conf (but you don't need to do that unless you want to forward a full X session to the host)
Shut down the VM.
Added 1280x800 to the custom resolutions in the VM settings.
Restarted the VM, came up in 1280x800.
Started X11.app, ran Xnest :1 -geometry 1024x768 -query [ipaddress of VM] to test XDMCP.
Eventually, I shut the VM down, and changed it to run on 512MB rather than 1GB of ram, to make room for other VMs.
You can find my modified xorg.conf and gdm.conf at
http://brent.bourgoine.net/stuff/parallels/ubuntu/
Hope that helps!