Parallels 6 - Cannot Compress HDD and Cannot Clone VM

I have a VM that cannot be cloned or compressed. The VM acts fine in all ways except these two aspects. I just upgraded it to v6 in the hopes that it would be able to do these two tasks. No luck.

It is running on an iMac with 10.6.8 and 4 Gb RAM. We do not have any Snapshot history. The Guest OS is XP SP3. The only thing we use this VM for is to run ChekFaxx. The actual size of the image in the finder is 26Gb and the Compressor in Parallels says it will compress to 7.6 Gbs. Which would be great because it would boot much faster.

I have tried endlessly to get the Compressor to do its job, to no avail. There are NO error messages displayed. In fact, the system acts like it did as requested: but the task zips by in no time and there is no change in file size.

I tried using Windows tools to defrag and clean up the disk which it did, but Compressing still would not happen.

So then I thought I could try cloning the image and work with that file. Unfortunately, the File/Clone menu items when the VM has been Shut Down are grayed out and inaccessible to me.

I really do not want to create a new image from scratch - don't have that much time in my life.