I have tried all the above suggestions to no avail including Perfect Disk and Iolo System Mechanic. None of the defrag programs worked. When deleting the file Windows 7 would immediately recreate the file at the END OF THE DRIVE. Why put a shrink option in if your software is going to block its access. I finally resolved my issue by backing up with Total Recovery 8 Pro. Then using their tools command line I formated the c drive followed by a restore. The restore packs all the files at the beginning of the drive. I rebooted and selected computer management, disk management, selected the "C" drive - right clicked and selected shrink. It gave me the option to shrink all the way to the used space. I backed it off to the size I wanted 115GB and it shrunk the drive. Everything is working fine.
I hope Microsoft will read these posts and change the philosophy of putting unmovable files at the end of the drive. At least put them in the middle where we have a shot at shrinkage.
Thanks everyone for helping me along my way.
BTW -- What I did is the way we shrunk drives back in the 70's and early 80's.