I have attached a picture I made to illustrate how it works, don't mind any faults I may have introduced, as I am not an expert in optics ^_^. The descriptions (although edited) are taken from
http://www.snipercountry.com/Articles/Parallax.asp
x. Object — the object (target) that you are looking (shooting) at.
y. Oculus — the eye.
1. Objective — the front lens is called the objective, and it forms the first image of the object we are looking at.
2. Erector group — because the first image is upside down/wrong way around, we (as shooters) can't use it, so we flip it around with a simple optical group called the erector group. This group gives us a new image that is right way around, called the second image plane. But this group has another very important job. Moving this group causes this second image plane to move, so micrometer spindles are put against the group, to get elevation and windage adjustments.
3. Zoom group — this group of lenses can change the size of the second image plane and then form a new (third) image plane behind it.
4. Ocular — this optical group is like a jewelers' loupe. It is (or should be) a super fine magnifier. Its only job in the whole world, is to focus on the reticle.
a. First image plane — the objective focuses the light to make an image of the subject, just like a camera lens. This image is upside down, and right/left reversed.
b. Second image plane — this is the second real image plane in the scope. In a fixed or variable power scope with a magnifying reticle, the reticle would be placed in this image plane.
c. Third image plane — in variable power scopes, this is the plane that the reticle is placed in. By being here, it allows the image to change size, but the reticle to stay the same size.
"In the scope that is set for infinity range, the object forms an image (upside down, right/left reversed) behind the objective (the first image plane), the erector cell "sees" that image, and flips it over and makes it right way around in a NEW image plane (the Second image plane). The zoom group adjusts the size of this image plane, and makes a NEW image plane (the Third image plane) that is the desired size. There is a reticle placed in this last image plane, and the eyepiece focuses on the reticle AND the image at the same time. When things are good, that's how the scope works!"
So to summarise, the knobs adjust elevation and windage by moving the erector lens/cell. The reticle can be placed in either the second (magnifying) or third (non-magnifying) real image plane. Thus, you probably adjust parallax by moving the reticle or something in the ocular to align the image planes.