For a full dev environment setup in a VM using VMware Workstation 7 with Visual Studio/SQL Server on XP, are there any major performance issues using the VM off a local drive vs USB drive to be concerned with?
Currently using it from a secondary local drive but considering moving to a USB drive so as to have it more portable so cna be used from a laptop when on the road and desktop when at the office.
Or is it better off copying the files as needed between machines onto the local drives?
You want to keep the VM files as close to the CPU as you can, especially for things like compiles that are going to be disk intensive. A local disk is best, a fast networked disk (1Gbs or better, 10Gbs) is good, and USB can vary.
VMs are easy enough to create and throw away, why not simply set it up and try it?
Try benchmarking it with something like HDTune. I'm sure there'll be a noticeable performance hit, but whether it's bearable or not you'll probably want to just try it.
With local vs. USB, the drive speed itself will probably be the biggest factor in speed. With NFS or SMB you still want a fast disk, but lots of small reads and writes will have more latency than with the direct attached methods.
BTW, this really doesn't have much to do with VMware, the advice holds true for compiles on the host as well.