I find Virtual PC (now free!) incredibly useful! VPCs are just so great for testing software, control development environments, trying shareware, training courses, etc. My main system is a laptop with limited HDD space so getting to as small as a VPC as possible (yet still useful) has been a pursuit of mine the last few weeks.
If you've tried, without tweaking, an install of WinXP Pro w/ updates is over 2GB. Wth all the Windows Updates, I got my WinXP Pro .vhd to 550MB. That's small enough to fit onto a normal CD or those 1GB USB keys. I just did a moderate amount of component tweaking (w/ XPlite), it you wanted to, you could probobly get it down another 25 or even 50 MB.
Tools: TweakUI, XPlite ($40), CCleaner, defrag, VM Optimizer
Steps to a Small VPC
That's it. You'll have a real small VPC image that can be used as a base image. Just save the .vhd and make copies whenever you need a new WinXP Pro box.
ReferencesThanks to Jeff Atwood and Tolong-lah! for their articles: