Windows 7: Win Virtual Hard Disk Performance Whitepaper from MS.

Using virtualization solutions from Microsoft is synonymous with leveraging the company’s Virtual Hard Disks (VHD), namely the files that encapsulate hard disk images. There are no less than three VHD formats that customers can currently opt for, Fixed, Dynamic and Differencing. Choosing one VHD option over the others, as well as selecting a certain Windows client or Windows Server are critical factors in determining the performance characteristics of virtual environments.