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you're absolutely safe all the time you are using a virtual disk, which is always recommended. this just sits as a very large file in, for example, /var/vmware/images on your system, and from outside vmware is just a big file and nothing more. it is possible in vmware server to explictly use a block device instead of a file, but it's really very obvious what you're creating and this is never a default option.
seriously, if you are running with a virtual disk and haven't deliberately pointed it at /dev/hda instead then you are 100% safe. that picture is just windows seeing a totally blank hard disk, which is what you've just created, in the form of a file.
cool. vmware isn't open source, far from it, it's just that they divolved their lower end products to be free. they make their money from their larger ESX servers and associated services, so giving away a smaller implementation will hopefully lead many companies on to the bigger stuff once they're hooked...
A caveat: you will probably run into problems with windows activation. I believe windows product IDs get tied to hardware configs, and your virtual machine will not have the same hardware config as your actual machine. I don't know where you stand legally.
I hope that it would be OK to transfer your windows installation from your hardware to a virtual machine (i.e. removing the installation on the hardware first), but you would probably have to contact Microsoft to request a new license key if you do this.
Does anyone have any experience of this? Are Microsoft sympathetic to this sort of operation, or do they require you to buy a new license?
I believe windows product IDs get tied to hardware configs, and your virtual machine will not have the same hardware config as your actual machine.
That activation scheme wasn't instituted until Windows XP. Win2K product keys aren't tied to the hardware, so the OP shouldn't have to worry about that. Also, corporations with volume license keys are exempt form the product activation. It's just the little guys who have to jump through hoops.
I presently am writing this on my Linux Workstation that has VMWare Workstation running with two (count 'em: two) copies of Win2K up AND running. So I have three operating systems running in this computer at the same time.