Because I just recently had to do this again, I wanted to send everybody to a link that I used to do this. I personally prefer to use Beyond Compare for my diff tool in Visual Studio. The link to this is here: http://whyiamright.wordpress.com/2008/01/18/changing-the-diffmerge-program-used-by-visual-studio/
In case his site every dies, i'll copy the steps here for your convience.
- Open Visual Studio
- Click Tools.. Options
- Select Source Control in the left pane. (If it is not there check the “Show all settings” box at the bottom left.
- Select Visual Studio Team Foundation Server.
- Click the “Configure User Tools” button in the right pane.

- Click Add in the “Configure User Tools” window

Now you are ready to enter the configuration for whichever tool you choose to use. Below is what I entered for Beyond Compare.
Compare Settings:
%1 %2 /title1=%6 /title2=%7

Merge Settings:
%1 %2 %3 %4 /title1=%6 /title2=%7 /title3=%8 /title4=%9

If you are not using Beyond Compare here is a post by James Manning that lists settings for different compare and merge tools including WinDiff!
af3ac428-c5b0-400c-b6b3-649a98127dc4|3|4.3
C# Development