Windows 7 kills VMWare performance by disk caching

Let me rephrase: your laptop was using Win-XP 32-bits and you've copied that installation to a virtual machine. Your laptop now uses Windows 7 but that doesn't matter for the whole question, right? Then again, your laptop seems to be powerful enough to run a 64-bits Windows 7 system so the VMWare host needs to be powerful enough to host it all.

First of all, you should always expect performance to go down if the host is as powerful as the original system. There's this virtualization layer in-between which adds some delays. I did the same with a laptop of mine, but the virtual machine I created is hosted on a much more powerful system, thus performance went up.

Possible bottlenecks could be an installation of SQL Server or other database inside the virtual machine. These tend to eat up a lot of resources. It might be better to install SQL Server on the host instead and make the VM connect to this "external" database. Other problems could be the amount of RAM that the virtual machine has. Even though XP works well with 512 MB, I tend to give my VM's up to 2 GB of RAM. That way, the VM will use less of it's own swapfile, simply because it has more memory available.

Another bottleneck could be the harddisk that contains the VM. If this is connected to your system through an USB cable then it will definitely be slow. I tend to give VM's two disks. One with the operating system which will be located on the fastest disk in my host and the other for data which could be any disk. Often I use a network share for this, and share a disk/folder on the host. This way, data is available from inside and outside the VM.

The system disk would be up to 8 GB in size and I tend to claim this disk space immediately, instead of having VMWare increase the disk size little by little. It does increases performance but eats up a lot of disk space.

Don't put this virtual machine on a compressed disk to save disk space! Disk compression tends to make disk access a bit faster since it actually has to read less data from disk but it also puts a bigger strain on your processor since it needs to decompress this data again. It puts a bigger demand on your CPU, which might even increase the heat inside your system. With laptops, the system tends to decrease the CPU speed when the fan can't cool down the system enough.

I can think of two possibilities.

Write caching causes Windows to start caching the data being written into memory. Since your harddrive is faster than the USB external (or techincally the USB interface), files start piling up in memory. Depending on your workload, this can push programs out of memory. So you now have a problem. Data is being read from the harddrive. But now Windows needs to page programs out of memory as the cache is filling up real fast. That can cause a lot of disk reads and writes.

This normally doesn't cause other I/O operations to fail. You should post the exact error messages. That's is rare and of huge concern as it could signal something worse than just an OS error message.

The second possibility is what happens when your external drive receives a flush cache command. Windows regularly sends a "cache flush" command to disks during longer IO write operations. This acts as a safeguard against data loss during power failures. When that happens, Windows stops sending data til the disk's cache is flushed. All this while, your source drive is still spinning, reading data into memory in preparation to send to the external.

There is a third possibility, but that lets start small.

BTW, that burst write speed is just to impress users and isn't real. Windows isn't sending data any faster then as it did during the middle and end of the IO write.

If you recall back to statistics class, what happens to the accuracy of your predictions as your sample size gets smaller?