I am running Windows 7 with all updates/patches as of August 10. Running the latest build of Parallels 10.4.0 (29337). I have the same issue and encountered this yesterday (9-12). This "error" gets triggered when the windows user Password expires and you are required to change it at the next log-in or windows restart. I only have one user account on this windows. This issue does not appear to be network related as I do not log into network shares. This windows only accesses drives connected to the local machine.
Restoring a previous virtual machine from a time Machine backup does not solve the problem (you still have the expired user password issue).
The only troubleshooting clue I can offer is that I have a 2009 Mac that I run the same version of Parallels on but have NOT run all the Microsoft updates on since about May 2016 ( in fighting Microsoft update issues earlier I had to wipe out the update history on this second machine, so no more easy info to get there regarding MS updates) . On this older machine I CAN update the expired password and NORMALLY RUN WIN 7. Best Guess is a Security Patch from Microsoft is contributing to this problem.
My win 7 password "life" is 180 days. So, Win 7 patches or Parallels updates since March 1 2016 are suspect. I would be more suspicious of MS patches from July or August
UPDATE !!
I deleted teh bad Win-7.pvm file from parallels, sent it to the trash, emptied the trash. Then,I restored from a July 1 time machine backup of the Win-7.pvm file, opened this file in parallels, and there were errors in that so this virtual machine would not even start. The windows troubleshooter failed to fix, so this option was dead in the water. So,
Deleted this file from parallels and sent it to the trash
Emptied the trash
Next I tried a time Machine restore of an Aug 1 2016 backup of the same Win-7.pvm file. (going to the same directory that I run the .pvm files from)
This file DID start, and of course the windows user password was expired, BUT I WAS ABLE TO UPDATE IT ! and get into this vintage of windows. I can recover from here, but it will be some work to do so.
I STRONGLY suspect August windows updated contribute to an issue here!!
Last edited: Sep 13, 2016