Have you installed Windows Home Server? If so, then you know that it has a hard lower limit of approximately 70 GB for the system drive, which will be partitioned into a 20 GB system partition and an "everything else" partition that's the start of the storage pool. There's really no way to change this behavior...
As for the rest, have you read the marketing materials and technical briefs available through the
Windows Home Server minisite? If not, you should. Doing so will answer some questions, and leave you with others. :)
Specific answers: VMs aren't supported. You can install in a VM, at a certain cost in performance. Hosting a production Windows Home Server VM will require you to dedicate a lot of disk space to the VHDs, so using Windows Home Server itself as the host for another WHS instance may not be the best plan (VHDs should be kept out of the storage pool). But it can be done.
You will not, however, be able to split the Windows Home Server specific functions to two separate servers. A client computer is joined to a specific server when you install the connector, and that's the only one it will back up to, that the media center connector will work with, etc. Shares are fine, however.
That you have many computers is interesting, but perhaps not useful. :) Windows Home Server really wants to be a bulk storage source, and you doubtless also have many small SCSI hard drives, which make bulk storage kind of difficult. You should consider obtaining a couple of large SATA drives, and a SATA controller, and using those in your server instead of most of the SCSI drives.
I'm not on the WHS team, I just post a lot. :)
