Disc space in VM's...is it real?

I make extensive use of VM's, as the regulars here knows. On my 32 bit Dell laptop, everytime that I create a VM, the disc space shows as 127GB, although my hard drive is 100GB (93GB usable), with three partitions on it. The partition in question is the one Windows 7 is on, it's only on a 38GB partition. So how can a VM have 127GB on the entire drive, let alone a 38GB partition? I have a similar one on the XP partition, too. Are they really usable, like one of those "cloud" things?

The VM that I worked with, you had two options.
First option was to set the VM drive and have all the space alloted from the main OS drive.
Second option was to have the VM drive expand as you used up the space on the VM drive.

Either way you have to set the drive size of the VM. the only difference was how much space that would take from the Main OS.

In your example you have the VM drive set to a size larger than you could possibly give to the VM. This is not wise to have it set this way. If the VM thinks there is more space and tries to use more than is available, you will see errors. However I'm not sure what the errors would be or how severe.

I only alloted 8GB of space for the OS. But the reason I noticed this is because I use Defraggler for pre Windows 7 use. That is what's showing the massive amount of space. Also, it shows a removable disc (a floppy) that doesn't even exist.