Hi Rao
1. You can perform the Database shrink during the off peak time. during the shrink process time keep a eye on the transaction log. before that take full database backup either tape or disk
just go through the Microsoft blog Shrink a File
2. If your are migrate the database to MS Sql 2008 R2 you can get the database compression feature it may reduce your disk space more then 40%, before that check the PAM your SAP version & SP level
Regards
Sriram