Once in a while, everyone runs into those little gotchas. I had mine today. I had just downloaded the Orcas Beta 2 bits vhd which is approximately 11gb. I extracted out the vhd to my hard drive with no problem. Then I had a brilliant idea. I have plenty of space on my external drive, let me move it there. I kept getting a wonderful error about diskspace requirements. Hmmm.
After checking to ensure I had plenty of space on the drive, I tried it again, with the same result. Then it hit me. I checked to see how the hard drive was formatted just out of curiosity and saw that it was FAT32. I did a quick search on hard drive size with FAT32 and came up with some notes that the maximum file size for a FAT32 drive is 4gb. Go figure.
So I have just moved everything off of my external and have reformatted it to NTFS. No problems, and it gave me a reason to clean my external drive up.