If you’re a developer and you are not utilising virtual machines (for things like testing installs, different platform installs, presentations, trialing beta software to name but a few) you probably should be. Microsoft’s Virtual Server 2005 and Virtual PC 2004 are both free, and VMware server is free.
Here is a very useful article posted by Jeff Atwood: Creating Smaller Virtual Machines showing how to create a minimal Windows XP Virtual PC image.