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You can create dynamic VHD files that will gradually grow towards a maximum size. Do they shrink as well? And if they don't, can you make it shrink back down to whatever size it actually needs to be at the moment?

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No they do not shrink by themselves, but you can shrink them manually.

Remember to run the pre-compactor tool before shrinking it.

In Hyper-V you shrink it from the disk settings dialog. If you're not running a virtualization suite I'm not sure how you are suppose to do it though - but there's a tool called VHD Resizer that might help.

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How would you shrink it manually? –  Svish Aug 12 '09 at 14:08
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Might be worth looking at this similar question with 5 or six answers. I suspect you can ignore the one about 'putting it in the dryer'.

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