It's a WinXP VM with a single snapshot and a single VMDK (except for the snapshot) file. The VMDK is not setup to pre-allocate the space (40 GB).
The only thing I do is run Outlook 2010 on it. Windows' TEMP and TMP environment variables point to a shared folder on the host to ensure the VMDK doesn't get trashed with bunch of temp file activity.
I don't think this is anything out of the ordinary. Wondering if the fact that there is a snaphot is a factor.