Now, how would a user get about to actually performing an install of Windows 7 to a VHD?
Take note that this guide will also work with Windows Server 2008 R2.
1. Boot from the Windows 7 DVD.
2. Click past the Language Selection screen.
3. When you’re on the Install Now screen (with the Install Now button), stop. Click SHIFT+F10″ to launch the Command Prompt (don’t bother going through Repair and all that this is the right way).
4. First, let’s take a look at the drive letters currently mounted. Type in fsutil fsinfo drives and hit enter. This will list all drives (you should know what your drive letters are). Take note of all drive letters.
5. Now,we need to open DISKPART. To do, simply type in diskpart and click enter. Pretty easy.
6. When DISKPART> appears, DISKPART is loaded.
7. If you want to just use an existing VHD, then use these two commands (of course C can be swapped out with any drive letter, but either way, you will need to specify the exact path):
select vdisk file=C:pathtovhdfile.vhd
attach vdisk
If you are using an existing VHD, skip to the next step; otherwise, if you would prefer to simply create a new VHD, then use this format of commands (the max option specifies the file size, here I have roughly 6GB, increase as preferred):
create vdisk file = c:pathtovhdfile.vhd max=6000
select vdisk file = c:pathtovhdfile.vhd
attach vdisk
exit
8. Now run fsutil fsinfo drives again. A new drive letter should have appeared, this is your new VHD. Take note of the drive letter (this isn’t necessary just making sure everything went OK).
9. Type “exit” again and hit enter. This will close the Command Prompt.
10. Click Install Now and go through the install as usual, making sure to select the Custom option when it appears.
11. When you come to the list of partitions and you are asked to choose an install location, ignore any warnings and select the partition that matches the size that you used for your VHD.
12. Windows 7 will automatically configure your boot loader for the VHD, but this is easily fixed. Just continue as normal, and when the installation completes and it prepares to reboot, it will show you the bootloader (should have two Windows 7″ options if you already had a Windows 7 install, this is normal). Select either OS and continue (just make sure that it’s a Windows 7).
13. Now, if you are fine with the way the bootloader appears, you can quit now. Otherwise, you can follow this guide and use the bcdedit command-line tool (really easy, only three commands) or download EasyBCD and use that to do this yourself. However, I suggest using bcdedit and making your bootloader a little more clear (Again, you can opt for EasyBCD if you prefer a graphical menu). open the Command Prompt as an Administrator (right click and select Run As Administrator).
14. Type in bcdedit /v and hit enter. This will display a list of entries in the Windows 7 bootloader.
15. Determine the VHD install and copy the GUID (listed as identifier) and create a new command like the following (replacing GUID with your identifer (should be a really long set of numbers with hyphens include all of it)):
Take note that you can edit the description as you wish. This is what will appear in the bootloader.
bcdedit /set {GUID} description Windows 7 (VHD)
16. If you want your VHD install to appear last (or second) in the bootloader, then execute this (again, replacing GUID):
bcdedit /displayorder {GUID} /addlast
Now, enjoy your new Windows 7 install. 
Credit: Windows7news.com
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