I am currently preparing a Virtual PC image for a presentation. Unfortunately the virtual harddisk file (VHD) was too small. I had to increase the size. Here is a way that worked for me:

1. Use the (free) tool VHD Resizer to reset the size limit of the VHD file. Note that this tool creates a larger virtual harddisk by copying the VHD file. Therefore make sure you have enough free disk space!
2. Use Microsoft's tool diskpart (here is a German description of how to use this tool) to extend the Windows partition.