Differencing Disks is one of the coolest features on
Virtual PC but sometimes it's not so visible at all. Differencing Disks
is a foundamental tip if you use Virtual PC for development, because it permits
you to have a standard OS installation (for example a machine with Windows
XP Professional or Windows Server 2003) and from this machine you can derive
other installations (the virtual machine with the OS will be the parent for the
others).
On Don's blog there's a clear explanation on
how to use this feature. I recommend it because you'll save a lot of disk space.
The key of the tricks is this choice: 
