Virtualization technology has come a long way in the last 5-10 years. Products like VMWare and Virtual PC are perfect for testing out products like Windows 7 or checking out the newest features in Ubuntu.
At any given time I typically have 3-4 different virtual machines (VMs) configured on my workstation. The only problem is that all of these different environments tend to eat up a lot of hard drive space. Of course, you can shrink the virtual hard disks but only to a certain extent. Eventually I came to the realization that most operating systems like Windows XP and Vista have a lot of unnecessary bloat. There are so many drivers, themes and other software included in the OS that I really do not need. Therefore, I started on a quest of creating a leaner VM. After a bit of googling I discovered the perfect tool for the job.
nLite is a tool which will let you build a custom installation disk for Windows 2000, XP and 2003. This means that you can now removed unused components like Media Player, Outlook Express, MSN Explorer from your VM. In addition you can slipstream service packs and hotfixes into your install so you do not have to spend hours after the initial install patching your OS. You can also build unattended installs which will allow you to pre-populate the registration key, create user accounts and tweak various other settings within the OS. As a result of this product I created an XP installer which was approximately 50% smaller then the standard install and it has Service Pack 3.
Also, if you like to build Vista VMs they have vLite available. The best thing about both of these products is that they are free.