Shrink it before you mount it
So I used the Disk2vhd tool to make a copy of an existing XP machine – http://technet.microsoft.com/en-us/sysinternals/ee656415.aspx
And I was thinking that because it was only 40 gigs in use that it would mount just fine. Silly me forgot the issue where the Virtual PC won’t mount the drive if it’s greater than 127GB. When you browse to have it set it up, it won’t mount the disk. So what you do is go into your Windows 7 machine and just mount the vhd as an additional drive and shrink it down.
Note: Virtual PC supports a maximum virtual disk size of 127GB. If you create a VHD from a larger disk it will not be accessible from a Virtual PC VM.
So shrink down that machine drive before you move it to mount it in the virtual PC.