Windows XP's Disk Cleanup & Emptying the Recycle Bin is Increasing .hdd File Size

Specifications
MacBook Pro
Intel Core Duo 2 2.4 Ghz
2 GB RAM
200 GB Hard Drive
Mac OS X 10.5.5

Parallels Desktop Version: 3.0.5608
Guest OS: Windows XP SP3
HD: 124 GB (Expanding Mode)
1 Snap Shot (1 GB)

Basically, my problem is that using Disk cleanup or deleting files is increasing my virtual hard disk size (.hdd).
It's cleaning my Windows HD, but eating away my Macintosh HD.

Macintosh HD
Capacity: 185.99 GB
Used space: 182.93 GB
Free space: 3.06 GB
disk1.hdd = 114.41 GB (Viewed from the Mac operating system)

Windows HD C:/
Capacity: 124 GB
Used space: 66.4 GB
Free space: 58.5 GB

I've used 66.4 GB, but the virtual hard disk is 114.41 GB!
What happened to the 40plus gigs of space?

Everytime I use Disk Cleanup or delete files in Windows XP, the virtual hard disk (.hdd) size on the Mac grows.
My Macbook Hard Drive free space went from 3.38 GB to 3.06 GB for an approximately 25 MB cleanup.

I did...
Disk Cleanup
-Downloaded Program Files
-Temporary Internet File
-Microsoft Error Reporting Temporary Files
-Recycle Bin
-Setup Log Files
-Temporary Files
-WebClient/Published Temporary Files
-Compress Old Files
-Catalog Files For The Context Indexer

I haven't tried the any of the compressor yet because I'm scared it will corrupt, take long, or ultimately make worse of this situation.

I'm having to delete things on the Mac side in order to operate the VM.

Any suggestions?
Forgive me if this topic has already been answered.

 

Steps to check

1. Backup VM
2. Check Snaphot manager if there are any , merge them, be carefull all files after last snapshot will be deleted
3. Note: Compressor may work only once , you need to Compact from Mac OS side
Hard Disk 1 - Advanced - Compact

 

Unfortunately

Unfortunately I can't make a backup of my .hdd because it won't copy onto my external hard drive.
I get the: Sorry, the following operation could not be completed because an unexpected error occurred.
And I definitely can't make a duplicate on my Mac HD since it's only got 3 GB space left.
So I'm kinda stuck.

And I was also curious what this package contents is all about? (Show Package Contents of disk1.hdd)
disk1.hdd.0.{5fbaabe3-6958-40ff-92a7-860e329aab41}.hds 36.63 GB
disk1.hdd.0.{118b89bf-1585-4106-b28e-10e607f374f2}.hds 78.23 GB
DiskDescriptor.xml 4KB

I'm tempted to delete the 36.63 GB file just because it fits the description for the wasted space.
But obviously, that would be the dumbest move on my behalf.
Bleh. I don't know, I guess I'm paranoid.
This is lame.

EDIT: Ah, I forgot about the clone function. I'm doing that right now, looks like it's going to take a while.
But for some reason I'm not that optimistic about the compression and whatnot.
We'll see.

EDIT #2: Why the hell does the clone need 170plus GB space for a 115 GB file?
I'm still deleting things from the External so I can stop getting that lame message before the cloning process.
I'm getting really irritated.
I think I need to just back up all my files in the Guest OS and switch to Boot Camp.

 

I suppose external HDD is FAT32, it is 4 gb limitation file size, you need to use HPFS file system

 

Yeah....I had ridiculously huge virtual memory too, but fixed it with adding anothr 4GB of RAM module