I was already running the latest Parallels 7 build when I upgraded to Ubuntu 11.10. Dynamic resizing of the screen was working in prior versions of Ubuntu. In the process of trying to fix this I reinstalled the Parallels Tools and it made no difference. The screen resolution is "stuck" at 800x600 -- Thats all that the system can detect. I have 256MB configured for video memory in the VM.
Output from xrandr:
xrandr: Failed to get size of gamma for output default Screen 0: minimum 800 x 600, current 800 x 600, maximum 800 x 600 default connected 800x600+0+0 0mm x 0mm 800x600 75.0*
I would try to add a screen resolution, but I don't know what the Parallels VM supports.
Has anyone figured this out?