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Are there any big differences in functionality between the two? What about licensing - IIRC with VMWare Server you need a separate XP license for each virtual machine.

Both companies have several different versions of virtualization, so that's not an easy answer. If you want to use Vista as a host, this new Virtual PC is about all there is right now. VMware offers a free beta of Worksation 6, but I wouldn't load beta software on Vista plus that's going to run out and cost you $150 down the road as VMware is bad about time bombing their products. You can also try VMware Server on Vista, but you have to boot into unsigned driver mode each time which is a major pain. As far as any break on licensing for your guest Windows VM's, I think that only comes into play if you buy Windows Server Enterprise Edition @~$2,500, but you do get to run 4 free Windows Server VM's on that system without having to buy the licenses for the VM's. We use both VMware, which is better for virtualizing other non-Windows VM's, and Windows Enterprise, which is cheaper for managing Windows Server VM's.

Thanks for the info. Is it the same deal with XP? I plan to stick with it for the foreseeable future just to avoid having to learn a new OS and in case it doesn't play well with any of our existing software.

When I try virtualization, it will probably be on an XP Pro machine with 3 or 4 virtual machines also running XP Pro. I could probably save one of those licenses by using Linux for the file server, but I'd have to learn Linux (and choose one of the way-too-many versions of it) and I don't know if or how I can set it up to share files over my network. I'd probably rather spend an extra $150 on an extra license than spend a month of Saturdays picking a distro and teaching myself how to use it.