Joe Homnick has a great post explaining how he is using USB Flash drives for Virtual PCs in the classroom. The flash memory in typical USB flash drives are fast for reading but notoriously slow for writing.
Joe puts the virtual hard drive (VHD file) on the flash drive and puts the virtual machine configuration (VMC file) on the local C: drive. The undo file will then go on the C: drive by default, which is much faster to write to than the flash drive.
I am absolutely going to try this out. Currently when I demo with Virtual PC I run the VPC off my local hard drive or an external USB hard drive.
Here is a picture of Joe’s 18-person classroom in the palm of his hand: