the syntax is
vmware-vdiskmanager -r "Windows XP Professional.vmdk" -t 0 new.vmdk
Never specify the flat.vmdk - always use the vmdk that is referenced in the vmx-file.
And note: the command creates a copy - so make sure you have enough free disk space
when the conversion is done - remove the existinmg vmdk from the config and add the newly created one