Someone else mentioned that there might be a problem if you use D: disk. Not sure if this is true, but it does sounds reasonable, since this disk may be a “compilation” of several physical disks.
C: is simply too small – I have 3 virtual machines installed and there will be no room to hold all their data.

I personally made a virtual folder, without duplication, in hope that WHS will NOT try to do “smart” things on it. So far its running fine. I encountered once error saying “Cannot start virtual machine because its disk is being used by another process”. Not sure what this was, but its gone before I logged into server to check which process uses it, so waiting for this to occur again

Good point. The way I did, I put the virtual Hard Disk in the C: drive itself.

The reason I did it this way is that for the virtual machine drive, I don't think I need to have tombstones or any other kind of gimmicks used to handle the DATA partition.

Alternatively, I *THINK* a user would be safe in simply adding the virtual hard disk drive into a directory in the D: drive which is outside of the shared folders structure. For example, I use uTorrent on my home server and the temporary directory of incomplete downloads is at “D:incomplete downloadsutorrent” — and I never had data corruption issues.