After trying Virtual Server 2005R2 I decided to try VMWare Server 2.0, another free solution. After a quick Windows 7 reformat (to completely wipe the Virtual Server modifications/workarounds), the installation of VMWare Server went without a hitch. I had a 100Gb partition for Windows 7 and then the rest of the 1Tb drive was broken into another partiotn where I stored the WHS virtual hard drive (not pre-allocated, equal to the remaining space). Later on a second 1Tb hard drive was put in the machine and I created a second virtual hard drive equal to the size of the drive.
The first thing I tried was Virtual Server 2005R2 running on top of Windows 7. This appears to be a very good solution because it allows a single machine to act as a PVR server, a HTPC front end, and a backup server.
I installed Windows 7 x64 on my secondary pc with my TV tuner installed. Since the plan was to attach this computer to the TV for everyone to use, I wanted to keep the host os locked down. I created a passworded user account to act as the administrator and an open account to be used soley for HTPC duties. You can follow this guide to learn how to set up a Windows 7 user account to auto-login upon boot.