I've been a proponent of development inside virtual machine for years. At my previous employer I pretty much moved the whole dev-department from host based development to VM development in 2004 when Virtual PC 2004 came out. Up until now I've always been pretty happy with Virtual PC considering its cost-benefit ratio (it's free and only was only slightly less powerfull than paid offrings from other vendors). However, with Windows Virtual PC Microsoft has seriously dropped the ball. Where all hypervisor based VM software enables you to run 64-bit guests, Microsoft only supports that with Hyper-V on Windows 2008 Server. Since we're not letting our devs run Windows Server on their laptops for several reasons, this is rapidly becoming a problem. Windows 2008 R2 is not available in 32-bit and SharePoint 2010 will also not run in a 32-bit environment. Because of this we've been forced to look for alternatives. VMWare Workstation was our first bet, but it'll take converting all our current VHD images, and I was not really impressed by the overall performance and manageability. Today we started testing VirtualBox and I'm impressed. It'll run our existing VHDs natively, also those that use differencing disks. In fact, the media manager makes it very intuitive to work with differencing disks and shows you the disk hierarchy. It also runs very smoothly, even before installing the add-ons in the virtual images.
VirtualBox comes in a free open source version that you'll have to compile yourself (how hard is it for Sun to also post the binaries?). It lacks some features, such as USB support, but we don't need the additional features. Even so, we are still considering the commercial license just for ease. It's only $50 per machine, with $30 for a subscription (starting at 50 users minium, so not for us though). Unless Microsoft steps up its Virtual PC development and offers 64-bit support within the next six months or so, we will likely move to VirtualBox.