problem solved
I had the same problem and here's what I've ended up doing to fix it.
1) Install PartitionWizard Freeware
2) In PW delete any partitions other than Windows and expand Windows partition to take up all of the unallocated space (reboot required)
3) In PW resize the newly expanded Windows partition to release any free space (reboot required). From this point onward, vhd can be compressed and any free space freed up using standard Parallels Desktop tools and any other adjustments to get the VM to show correct disk size of the windows vhd are of a purely cosmetic matter - affecting only how it's visually presented. Follow the next step if you are a perfectionist like me and want to fix the presentation too
4) You are going to end up with a new Windows partition set to correct size. Now you can reduce the vhd using Parallels standard resizing tool, don't forget to uncheck the 'resize filesystem' box since you are now dealing with the unallocated space
Last edited: Jul 27, 2013