My fear was correct,
WinImage does copy the whole file.
1. First I tried converting an existing VHD to VHDM, it turned out it wasn't
bootable in VMware, not sure why, could be problem with image.
(Same boot problem as with the VHD when forcing VMware to use it)
2. I then used WinImage to create a new VHDM image from the existing
harddisk which has bad sectors.
WinImage asked if it had to retry or skip, I choose skip all after a while,
WinImage nicely skipped over bad sectors.
Finally it created the image.
3. The image was bootable, it did include a weird boot manager from windows
7 and previous boot-into-vhd-failed-attempt-menus.
However Windows XP Pro x64 Edition kept crashing: I tried "normal boot" and
"safe boot", I tried changing VM settings, I also wondered if I had
to remove drivers from the image or so... Ultimately I tried again and
choose: "last known good configuration", this worked !
It was great to see Windows XP Pro x64 Edition boot... it installed virtual
drivers etc, LAN/NAT/Internet/Web browsing was also working
as well as hardware acceleration, so this proves that using Windows XP x64
Pro edition inside VMware Workstation 7.1 is possible !

=D
For now I probably have little need for this big 512 GB image but I just
wanted to know if it would work or not, and so it did.
Windows 7 is pretty great so far ! I installed lot's of extra applications
and it's great.
It's like a time jump into the future !

=D Windows XP was/is from 2003
and Windows 7 probably from 2009, so that's a six year jump !
Microsoft sure has been busy !

=D
I used:
1. WinImage to create the vhdm image.
I also converted file disk images to vhd with:
1. VHD Tool 2.0
I also auto-mounted the vhd's with:
1. VHD Attach Tool 2.0
^ Really nice tool.
Only thing I still need is a way to change the letter assignments, but all
in due-time

(so no hurry yet

)
Bye,
Skybuck =D