I'm having the same problem with 20 GB disk limitation. I'm running VMware Fusion 2.0 on a Mac 10.5.5 and I have a Windows XP virtual disc.
When I access VMware tools (from Mac) and I go to Virtual Machine > Settings > Harddisk settings I can manually adjust the size of virtual disk and optionally check the box "Pre-allocate the disk space". At the moment setting is 50 GB. But...
When I load my Windows XP and I rightclick on my Windows volume C: it shows only 20 GB in total. At the moment 4 GB are free in Windows XP and other day when I was trying to install a 2-disc game (dvd) my Windows said: "There is no enough diskspace available on your drive C".
My question is: what the hack is my setting of 50 GB affecting actually? Not what I hoped for any way

Any idea how I can increase size of Windows volume so I have it available from within XP?
Thanks!
P.S. Even if I check the box "Pre-allocate disk space" it doesn't change the size from within XP.