A Virtual Hard Disk (VHD) is a file that encapsulates a hard disk image. VHDs can be used in new and interesting ways. VHDs first were created to be the storage media for Virtual Machines (VMs). Today, VHDs are used to ship trial versions of software, used in backup solutions, used for bug triage (e.g. customers can convert a physical disk to virtual and share it), and even used to store multiple boot environments. VHDs are a very flexible storage container and are not tied to any single file system format. Since June 2005, Microsoft has made the VHD Image Format Specification available to third parties under the Microsoft Open Specification Promise (OSP).
http://download.microsoft.com/download/0/7/7/0778C0BB-5281-4390-92CD-EC138A18F2F9/WS08_R2_VHD_Performance_WhitePaper.docx
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