How can I reduce a system partition size to avoid bad sectors

you can use acronis products
http://www.acronis.com

On a server I would be extremely careful and I dont recommed repartitioning a server.  If it fails you have a dead server.
Acronis can be used and if I was going to do it I would you that product but I would think twice before messing with partitions

Greeting from the West Island!

Gparted (http://gparted.sourceforge.net - download the ISO image) is a bootable partition editor - it runs integrity checks before it performs the partition resize. You can also use it to image discs or partitions. I've used it many times without any issues.

And best of all, it's free!

ryansoto is right NTFS file descriptors and journals are security sensitive and most average partition tools won't allow messing with it.  You can, however, use Drive Image (now owned by Symantec) to clone the faulty drive with the options to ignore file sytem and bad sector errors.  

I would suggest Hiren Boot CD 9.3 simply because most imaging and partitioning tools are on there and for what you want...booting from it into DOS is the best way.

Be sure to set the new drive active otherwise it won't boot :)

Acronis will also clone but there are other products stated in other posts here.  I am just fmailiar with those products.  Good luck.

Have you tried the drives manufactures site.  Disks are designed with extra sectors so the " bad sectors" to be remapped in firmware.  Often you can use the manufactures diagnostic tools to check for bad sectors and automatically remap them.

i recommend bootit-ng, works flawlessly. (and free for what you want)
boot from floppy or cd, do NOT install it on the disk - hit cancel
select parttition work, select the partition, click resize and enter the new value
done!
www.terabyteunlimited.com/       

if only 10gb is in use I.E. 60gb free space...use one of the tools to just move the partition to an empty part of the drive, no need to re-size

I like your approach joediggity2, considering the risks outlined by sheild1, I've downloaded the Seagate DOS disk check utility (the disk is a Seagate Barracuda) that boots from CD then checks each drive disk sector  with the option to remap faulty sectors. Once I've done that I still have the option to adjust the partition size (with Acronis, thanks X-Reagent) and clone a new disk.

Will I need to reactivate Server 2003 with Micro$oft after that?

you're allowed a difference of 3 hardware devices before the need to re-activate, for a change of hard drive you should(?) get away without having to.

I don't think you will but am unsure as I have all Select Licenses.

If you clone the partition in non Windows area (from boot CD) and then set the old partition inactive you need just to edit Boot.ini file and boot to newly copied partition. No license activation should be required. But as far as I know Microsoft allows 9 hardware changes (tested myself on VMware) before asking for license key.
By the way, Partition Manager 8.5 has Boot records editing tool on its Boot CD and also allows resize\copy and modification of partition parameters  from the same interface.

I ran the Seatools utility today but the number of bad sectors discovered exceed 99 with only 10% of the drive scanned. Seatools stopped scanning at this point. Does this mean the number of bad sectors exceeds the spare sectors available to remap to?   Does anyone know if I can increase the threshold that Seatools stops scanning  from 99 to say 199?

HI,
You can do so with the help of Diskpart command on command line utility,here you can resize your disk change your disk to dynamic also.

FillSee, you have reached the point where you need to rebuild the system. Drive cloning software excludes bad sectors map during clone operation so if any of the bad marked sector refers to system area then you have nothing to do than to ruin your current system.
Frankly speaking I would start movement to new HDD right now because with each write\read operation to HDD the number of bad sectors increases. If vendor provided tools found so much bad sectors then no use in trying to recover what is in fire already.

regards

Yep, looks like we're going to have to rebuild the volume from a new Server 2003 image, re-install apps and restore data files from backup - it's not economic to mess around any longer. Thanks for your help it was worth the time to hone my skills and knowledge in this aea. I've decided to share the points between JorDiggity2, Sheild1 and nobus.  

Thanks for your help. I learned a lot!