I have run into problems sometimes when my development VPC is low on hard drive space. By default, you get 16 GB of hard disk space on the VPC virtual disk. Recently I created a new VPC - installed MOSS 2007, SQL 2005, Office 2007, SharePoint designer and VSTS - and figured I would use this VPC for development around MOSS. Turns out that a few days after the install, a balloon popped up stating that the VPC was running out of space. I did not have many programs that I could get rid of, so I decided to confront the problem instead of delaying it.
I navigated to the Virtual PC console and clicked on settings for the currently running VPC. I clicked on the Virtual Disk Wizard and created a new disk with the default settings to be used as the Hard Disk 2 for this VPC - to get me more space. I shut off the VPC and assigned the Hard Disk 2 settings to use this new disk file. After restarting the VPC, I still did not see my new space on the system drive. So I navigated to Computer Management under Administrative Tools and clicked on Storage --> Disk management. That started a wizard where it asked me to initialize my new disk (if it does not automatically start the wizard, you can right click on the new disk and start it manually). I initialized my new disk and then right clicked on the disk again to format it. I chose the New Volume wizard to basically partition the drive. I chose the simple volume type on the next screen. On the next screen I selected the disk and set the disk size (used the defaults of 16GB) and clicked next. On the next screen, I assigned E: as the drive letter. The next screen presented me choices of formatting the volume or not. I chose to format the drive with NTFS as the file system and named the volume label as data. The next screen just showed me a summary of my choices and I said ok. A few minutes later it was done formatting the drive and I had an extra 16 GB of space :).