Increasing Disk Size of a Differencing VHD
I recently ran into a problem where I needed to increase the size of a virtual machine's primary partition. The problem was that the VM's primary partition was based on a Differencing disk. As such tools like the VHDExpander don't work on them (only dynamic and fixed disks). What I had to do was to merge the Differencing disk, thereby separating its relationship with its parent disk and then conducting the resize operation.
Check out this URL for more information on disk merging operations in Virtual Server 2005 R2 SP1