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Thank to my buddy Raul Camacho, I played with differencing disks on Virtual PC. It is a pretty cool little feature, but it causes havoc when you want to apply security patches on your base OS. Still, in Development environments where security patches and service pack levels should only change when production changes, it would work pretty well and minimize space on laptops/desktop.
The post on dev4net.com is great at showing off this VPC feature (thanks for the link Raul).