These are questions that comes up pretty regularly: What happens if a drive fails in my server? What happens if my OS becomes corrupted and I need to reinstall?
Here are the risk factors if a drive in your server fails (it could be any drive, the system drive isn't really magical except in that it contains folders named shares and folders, and those will contain tombstones):
You will lose files from your shares if A) duplication is not turned on for every share, and B) files in one of those unduplicated shares are actually stored on the failed drive.
You will lose backups (potentially the entire backup database) if any component of the database was on the failed drive.
You will lose files, functionality, or configuration from external applications (such as the HP Photo Web Share on MediaSmart servers) or add-ins if the ISV has chosen not to enable duplication on their application folders on Windows Home Server.
In addition, if the system drive is the one that fails, you will lose:
Users, which you can recreate and which will be reconnected to their user folders.
Add-ins, which will need to be reinstalled. You may also lose configuration you did for those add-ins, if they didn't persist the configuration in a (duplicated) application folder.
Any configuration done outside of the Windows Home Server console. So software installed from the server desktop (plus configuraiton of same), OS tweaks, etc.
Tombstones (pointers to the actual files on secondary disks; these are all that you will normally ifnd in D:\Shares\etc. on your server), which will be recreated as part of the server reinstallation/recovery process.
If you suffer OS corruption, then you will hit the first three bullet points under "In addition, ..." above, except that you won't lose add-in configuration data if the add-in used an application folder to store the information. You shouldn't suffer any other data loss.