Karlosp.net

Turn off the virtual machine;
Commit/remove all the snapshots first! (I forgot to mention this, thanks JimO)
Create a good backup of the files!;

Open a Command Prompt and go to:
C:\Program Files\VMWare\VMWare Server

Run this command to expand the virtual disk:

Note: Because this only expands the disk and not the partition, you'll need to resize the partition table as well. This can be done by 3rd party tools like 'Partition Magic', but also with 'diskpart.exe', builtin into Windows. In my case, this disk is a boot disk, meaning it can't be done on the virtual machine itself. I used another my 2nd virtual machine, running Windows XP.

Add the increased hard disk to a second virtual machine (must be turned off first!).

http://www.leonmeijer.nl/archive/2007/05/07/25.aspx