Jeff Atwood writes in his blog:
Now that Virtual PC is finally free, I’ve become obsessed with producing the smallest possible Windows XP Virtual PC image. It’s quite a challenge, because a default XP install can eat up well over a gigabyte. Once you factor in the swapfile and other overhead, you’re generally talking about around 2-4 gigabytes for relatively simple configurations.
My best result so far, however, is a 641 megabyte virtual machine image of a clean, fully patched Windows XP install. Not bad. And here’s how I did it.