After installing ver 3 and starting my VM, Windows launched two "found new hardware wizards". I was expecting to be prompted to run Parallels Tools so cancelled them. I restarted hoping to get the prompt second time but it was the same. Under actions/run tools the only option was to "cancel running parallels tools" The tip is to cancel running parallels tools, and then you have the option to "run parallels tools" after which all was well. This happened on both my XP and Vista VMs Maybe Parallels tools was running and didn't need me to cancel and restart it but I waited a few minutes for something to happen before cancelling.
I found this too, except I also had to manually double-click on the mounted CD in explorer as I have AutoPlay disabled (because it's such a massive security hole). Same goes for running Compressor.
