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

  1. Install Windows XP Pro SP2
  2. Install all Windows Updates
  3. Follow steps 3. to 6. (first group) then steps 1, 2, & 3 (second group) in here
  4. Follow steps 1. to 11. (first group) in here
  5. Complete w/ steps 4, 5, 6 (second group) in here

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.

References
Thanks to Jeff Atwood and Tolong-lah! for their articles: