I had precisely this problem when I upgraded Parallels to RC1 from an earlier beta. I fixed it by doing the following:
1. Launch the VM and log in to Windows
2. Uninstall Parallels Tools, using the Control Panel
3. Shut down Windows
4. Launch Windows again
5. Install Parallels Tools via Actions > Install Parallels Tools
I don't know why this works, exactly, but perhaps it's worth a shot.
Last edited: Jan 18, 2007