Is there a way to make the .fs "/dev/cobd0" a dynamically expanding file like a .vdi in virtual box? For example if I have 10 GB of files stored on /dev/cobd0 then the file 'ubuntu'.fs is 10gb, however if I only have 2 GB then the file size will be 2 GB.
You can use the option "sparse" on NTFS, this will reserve only the size you used.
An existing image you can transform with MkSparse.exe
A better (and saver) way would be to create a new empty file with MkFile.exe and the option "-s":
Than format this file with ext3, copy all your files into the new and switch to the new image file. Steps finds in wiki:
MkFile and MkSparse can download from http://www.henrynestler.com/