Windows XP uses several hundreds of megabytes (or more) of your hard drive to swap data in and out of RAM, to allow you to run multiple applications at once even when these applications need more RAM than your PC as available. You can increase the performance of Windows in Parallels, and recover some space in your main Windows HDD, by moving the Windows swap file to a 2nd, fixed, virtual HDD.
Step 1 - creating a new fixed Parallels hard drive
Close your Parallels virtual machine.
In the Parallels Desktop window, click on the Edit button
Click on the Add... button, click Next and select Hard Disk as the type of Hardware you want to install, and click Next.
Select Create a New Virtual Hard Disk and click Next.
Change the size of the virtual disk you want to create to about 3x the amount of RAM you have allocated for Windows (1500MB to 2000MB should be fine if you are not sure).
Select Plain as the type of drive you want.
Give the virtual drive file a name you want, and Parallels will create the virtual drive file for you and add it to the list of resources.
Step 2 - reconfiguring the swap file in Windows XP
Start your Windows XP Virtual Machine, login (if you need to) and wait for Windows to discover and install your new hardware (a new IDE device).
On your desktop, select My Computer and right click on the icon to select the Manage option.
In the Computer Management window, select Disk Management in the Storage section. A Disk Wizard will start.
Go through the Wizard by clicking Next (which will initialize the disk and not convert it to a dynamic disk). Your new disk will now appear as Online and Unallocated (with a black bar) in the Computer Management window.
Now you need to initialize the new disk. Do a right click inside the new disk Unallocated rectangle with the black border and select New Partition.
Click on Next through the New Partition Wizard to create a new Primary Parition using all the available space, assigning it a new drive letter and the NTFS file system.
Close the Computer Management window when the formatting of the new disk is done.
Go back to the My Computer icon on the desktop and right click on it to select Properties. Click on the Advanced tab of the System Properties window.
Click on the Settings button under Performance and go to the Advanced tab of the Performance Options window.
Click on the Change button in the Virtual Memory section. There are two things you need to change in this dialog box:
1) set the paging file size for your main drive to No Paging File. Click on Set, and OK if a warning appears.
2) click on your new disk in the upper part of the dialog, and set its Paging file size to System managed size.
Click on Set, click on OK to close all of the open windows, and then reboot your system.
You're done! :-)