Thanks for your help ZBoater! I have a 320g hard drive. 25g is Bootcamp, 295g is Mac HD with 40g free. Following your instructions the Parallels VM is 100g. But here's my confusion and question. With Win7 running in Parallels - when I click on the C drive it shows its size at 160g with 81g free. Is it possible to move 75g of those 81g to my Mac HD to use in my Mac Lion OS where I do most of my work now? I saw when I click on Virtual Machine in the Parallels menu bar and then on Configure > Hardware > Hard Disk 1 - it shows 160g there on Windows 7-0.hdd. When I shut down the VM there is a slider for that which is at 160g. Is there some way to use that to reduce the Win7 C drive size by 75g and get that to work on the Mac Lion side - giving me 75g + 40g = 115g free space in Lion?
The slider is how you'd adjust the size, but I'm confused. If you have a 25GB Bootcamp partition, and you've used that as a source for your VM, your Windows 7 pvm file should be very small. Mine is only a few MB. That's because the VM is running off the source in the Bootcamp partition.
To answer your other question, no, you can't take virtual hd space and give it back to your host OS (in this case Mac OS). That virtual space is "fake" and only available to the guest OS while it's running.
That Parallels vm size of 100GB is strange. What that tells me (and I could be wrong) is that you are not running your Windows 7 vm off your bootcamp partition, but rather it's a vm in and of itself, and you've installed a lot of stuff inside your vm. For comparison sake, I have a 50GB Bootcamp partition. When I launch my Windows 7 vm inside of my Mac OS, rather than reboot into Windows natively, Parallels uses the Windows OS that's in my Bootcamp partition and launches it inside a vm. But what that means to me is I only have the 50GB available to me, as I'm running off a real hard drive, not a virtual one. Anything I install while running my vm goes into that 50GB partition. And if I reboot my Mac into Windows natively, anything I've done in my Windows 7 vm is right there waiting for me.
Some people run their Windows 7 vm as a straight vm without relying on their Bootcamp partition. In these cases, everything you install in Windows (apps, games, etc.) is stored in the virtual hard drive inside the pvm file. That is why some pvm files are huge.
Here's something else for you to try. You say your Windows 7 pvm file is 100GB? Right click on it, and click on "Show package contents". That will show you what's inside of it. There will be a file in there with an extension of .hdd. How big is it? Thats your virtual hard drive. I once had a log file that was several GB.