Increase screen resolution in Parallels Desktop 4 for Windows

I have successfully installed Parallels Desktop 4 for Windows on my laptop which is running Windows 7 Home Premium. The virtual machine is running Windows XP. I am trying to increase the screen resolution to 1280 x 1024. I have tried going to properties \ settings and selecting the resolution and clicking Apply and OK. The laptop doesn't change screen size, and when I go back into Properties, it has kept the default setting of 1876 x 845. Any ideas out there how I could resolve this problem? The font sizes are so small at this resolution that I need a magnifying glass to read some text.