How to shrink a Windows XP VMWare Fusion virtual machine?
In VMWare Fusion 3. There are 2 parts

Prerequisites are the VM cannot have any snapshots and the virtual disk does not have a preallocated size. Making virtual disk sparse

Clean up Windows

I would then in Windows run the MS Disk Cleanup tool to remove files and then Disk Defragmentor to put all the space in one place.

VMWare tools includes a shrink disk command

Then power off the VM

Clean up the virtual disk

Search for Clean Up a Hard Disk in Fusion's help


  1
  From the VMware Fusion menu bar, select Window > Virtual Machine Library.
  2
  Click the thumbnail of the virtual machine and click Settings at the bottom of the library window.
  3
  Under Removable Devices in the Settings window, select Hard Disks.
  4
   In the Hard Disks panel, select the hard disk in the source list.
  5  Click Clean Up Disk in the Disk Cleanup section.  
  
  VMware Fusion displays a progress dialog as it cleans up the virtual
  disk.