The Xephyr window also uses much less space (800x480). Instead of full desktop you can run say command line terminal besides it. Or not.

Provided your Xephyr uses hardware rendering this is a good solution.

To stop Xephyr from eating your mouse in the VM you need to install VMware tools (or VBox equiv) in the guest OS.

You're also missing out on e.g. Eclipse which comes with the SDK VM images.

You can also run SSHd on the VM and use SSH client (e.g. PuTTy) to log in from Windows.

You probably won't need the VM desktop. So keep it minimized except for Xephyr.

What I'd like to do is get Xephyr working on a remote computer via remote desktop. Granted, the 3D stuff won't work well then, but at least it will use less battery juice from laptop.