differencing disks

[WrigleyF]

What do differencing disks do for a virtual server? Do they make a big difference in terms of the performance of a server?

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Differencing disks can increase manageability, especially when multiple VMs share a similar configuration, and can dramatically reduce the amount of disk space required on a Virtual Server host computer. The drawbacks are that differencing disks can be difficult to manage and large hierarchies of disks can potentially lead to performance problems, especially if all of the physical VHD files are located on the same disks or arrays. Within Virtual Server, you can merge a differencing disk with its parent -- an operation that commits all the changes and either updates the base VHD or creates a new VHD file.
What is differencing disk? - Definition from WhatIs.com