The goal of the expanding disk is to save disk space in the primary OS. It cannot provide you with an infinitely expanding disk for your guest OS.
Expanding disk: The file that stores an image of an expanding virtual disk and resides on your Host OS is small initially and grows as you add applications and data to the virtual hard disk in guest OS. In terms of the guest OS, the virtual hard disk capacity is fixed and equals to what you specified during virtual machine creation. In terms of the primary OS, the size of the virtual disk image file grows as you add new applications and data to the virtual hard disk. Using disks in this format saves space on the hard disk of your physical computer.
Let's say you have created an expanding disk at the default size of 8GB. When you install Windows, it first uses about 1.5GB. With the expanding drive, the actual footprint of the .hdd file in Finder will be the same 1.5GB. As you add files and install programs, the drive file will expand to contain them, up to 8GB.
In contrast, if you have a plain disk at 8GB, Finder will read your .hdd file as 8GB, even if it's totally empty.
If you need your expanding disk to be larger than 8GB, you need to run Image Tool and increase the size of the image file. For Parallels Desktop versions 2 and 3 and Parallels Workstatopn 2.x you will have also to either create a new partition or to run a third-party utility to actually expand the Windows partition into the newly created empty space. When you restart Windows, it will detect the new space.