The "Windows XP Mode" Virtual Machine created by VMware Player/Workstation is in essence a hybrid linked clone and you cannot consolidate its snapshots or defrag it internally.
If you want to clean it up then backup any User Data that's stored within the Windows XP filesystem and then delete the Windows XP Mode Virtual Machine and recreate it then restore your User Data. I know that's not what you wanted to read but that's the way it is! 
I don't believe Microsoft intended to allow other virtualization products to be used to run Windows XP Mode and if you use Microsoft's product then you can perform regular maintenance to keep it running better over time then with VMware Player/Workstation and not have to deal with the idiosyncrasies of a hybrid linked clone.
perhaps I should just install Win XP Pro and use the XPMode key instead; assuming that doesn't violate the EULA for XPMode...
I'd assume it would violate the EULA although its been a while since I read it so just from past experience I doubt it's permissible however I'd also suspect that the Windows XP Mode Product Key will not work with other then the Windows XP Mode package downloaded from Microsoft.