I was in a similar dilemma. I used Disk2vhd on my old WinXP to create the vhd file to use as my xpmode virtual hard drive in my new Win7 computer. Same problem with the original disk over the 127 gb limit. The information here was useful; I attached the vhd using Disk Management. I then used Partition Wizard Home 4.2.2 (free) to reduce the size of the vhd partition and zero out the “empty space”. I then used the VHDResizer to bring the drive to a size below the 127gb limit by creating a new smaller vhd file. Afterwards I created a new virtual machine in Win7. When the wizard asked me whether to create a new VHD or use an existing one, I pointed it to the vhd file I created with VHDResizer. I was able to boot the virtual machine and do some more housekeeping to try and reduce it further. I expect that after I uninstall some unnecessary software and zero out the empty space from within the vm I might be able to reduce the size of the disk even further. So far I have not had to do anything else more complicated than what I wrote here. Thanks for the post, it sent me in the right direction.