With a goal of having a VM as an application framework, the footprint should be as small as possible. So here is a step by step method for reducing the amount of space needed for a WinXP Pro VM.
Install WinxP Pro SP2. Then run XPLite

Disable all non essential services. Remove all gifs, jpgs,hlp files, wav files, bmps,avi, doc,xls, temp installation files, reduce to temporary internet file stotage to 10MB, disable system recovery, and do not hibernate.Defrag, and run system cleanup. Then run VM optimizer by invirtus.
This will reduce the VM size to half, if not more. The maximium reduction is 80%.For some more general system tweaks and for weeding out non-essential files, here are some more tools:
1>Pagedefrag - defrags registry and pagefile upon boot. Good speed increase

2>WinDirStat - Graphical treemap gives you an instant graphical representation of the hard drive and what is where. Excellent tool I use daily. (P.S. Its open source and does not have to be installed)

3>BootVis - Scans your computer upon boot (only run once) and optimizes the loading sequence of drivers and services in order to reduce overall load times.

4>Disable system restore (why would you need it if you are already creating snapshots) - that will free up some space and make you less susceptable to viruses
5>Use host shared folders - create a host share (usually you have to enable this option in the settings) and putt all your important files for the vm there. Things like drivers, system install files, other things that either won't change between snapshots, or shouldn't change. It's like having a network drive that is not affected by the VM tinkering, but yet is accessible just as quickly as if it were there.
6>Set a daily defrag task to be scheduled.
I'll add more as I thinkof them, maybe even create a wiki for this.

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