You need to extend the windows disk size from a running windows.
Here is how you do it: http://kb.vmware.com/selfservice/microsites/search.do?language=en_US&cmd=displayKC&externalId=1007266
Now that you have extended the VMware image size, you need to start at #6 in the link.
EDIT:
I don't want to write a new answer, and the comment text-box isn't large enough - so here is a more less re-write of the link:
1) extend the VMware image size.
2) attach the HD image to an existing virtual disk of the same OS as the resized image (Virtual Machine Libary->[select the VM to use]->Settings->Hard Disks->[click +]->[select the new HD in left menu]->File name->Choose existing disk...->[navigate to the resized image, and select the .vmdk]->[choose "Share this virtual disk....."]->Open->Apply) - if you will go the safe way, you'll choose "Make a separate copy af the virtual disk" instead of the "Share this virtual disk...."
3) Start the virtual machine that you just attached the new HD to.
4) Now because you are using Windows 7, you need to go to "Start->Computer Management->Disk Manager" and right-click on the partition you need to extend, and select "Extend Volume".
5) power off (shutdown VM) - and remove the HD attached in #2 - don't delete it...!
6) if you in #2 choose to make a copy of the .vmdk, then you need to replace it manually in the VMware image file (package) - right click on the VMware image (.vmwarevm)->Show Package Contents.
7) Power on the virtual machine from #1, and verify the disk size change.
Best Answer
In VMWare Fusion 3. There are 2 parts
Prerequisites are the VM cannot have any snapshots and the virtual disk does not have a preallocated size. Making virtual disk sparse
Clean up Windows
I would then in Windows run the MS Disk Cleanup tool to remove files and then Disk Defragmentor to put all the space in one place.
VMWare tools includes a shrink disk command
Then power off the VM
Clean up the virtual disk
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Clean Up a Hard Diskin Fusion's help