If you get an error, saying "'Diff application /sgdm.exe could not be found" then first, try to download and install the latest Vault client. If that's not an option for you, then try this:
In Vault, go to Tools -> Options -> Diff/Merge:
And replace all instances of %VAULT_EXE_DIR% with an absolute path to sgdm.exe.
More info can be found here: http://support.sourcegear.com/viewtopic.php?f=5&t=12841
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