You can choose a different location in the "New Virtual Machine Assistant" by clicking "Customize Settings" in the last step of the assistant. Definitely not an intuitive way to go about it.
You can also move an existing VM. To do this, you move the VM to the new location, launch VMWare Fusion, drag the VM from its new location to the "Virtual Machine Library" window, and delete the old VM from the "Virtual Machine Library" (the old one will have a question mark as its preview because it's pointing to the old location).
As @binarybob pointed out in the comments, if the VM is moved to a shared location (e.g. an external HD or /Users/Shared/) then other users will have access to the VM.
Example:
The selected VM will be moved:
After moving the VM in the Finder, VMWare will show the VM as missing:
Drag the moved VM from its new location in the Finder to the "Virtual Machine Library" window:
Delete the old VM (with the question mark as the preview) from the VM Library. This will only delete VMWare's reference to the old location, it won't do anything to the VM itself.
When you open the VM after being moved, VMWare will ask you if you moved or copied it. Because you moved it, choose "I moved it".
You cannot install OS X Mountain Lion through the Recovery HD to VMWare Fusion. It doesn’t have the necessary files. An OS X Installer Image is required, which you can obtain from within the Install OS X Mountain Lion.app. It’s called Install ESD.dmg, and it worked for me, so it will most likely work for you.
Best Answer
I use two workarounds in cases like this.
In the VMWare Fusion View menu, select "Full Screen". The guest OS fills the entire Mac screen, except for a Fusion menu bar with menus View, Virtual Machine, and Window. Then from the View menu, select "Single Window". When the guest OS window comes back, it's shaped better to fit the host OS display.
Log in to the guest OS, then use the guest OS's control panel for display settings to reduce the size of the guest OS's display -- say to 1024x768. Then from the Fusion View menu, select "Single Window", if not already selected. The result is a guest OS window which takes up less of the host OS display. Adjust from there.