a new feature has been added to Windows 7 and Windows Server 2008 R2 which allow users to install the OS on a VHD file and therefore to boot from that file and use it as OS partition.

I was trying this feature 2 weeks ago, but I failed to install it, it seems for me that because I am using VHD Dynamically expandable Disk.

I have successfully installed Windows Server 2008 R2 on my laptop HP 6730b and below a snapshot of Disk Management snap in

and here is the list of drivers for drives attached to your system, you will see MSFT Virtual Disk SCSI Disk Device; this is the VHD driver.

Installing Window 7 / Server 2008 R2

1- Boot from you Windows DVD.

2-Start the command prompt by press shift+f10 on the install now screen.

3- Launch Diskpart command utility by typing diskpart on the prompt then type the below commands.

now you can get back to installation and continue installation as normal by selecting the virtual disk 

Notice that there is a message to inform that you can not install on this disk you can ignore it safely.

continue normally and you will find bootable Windows through VHD file.