VHD is an acronym for Virtual Hard Disk. Files that have the .vhd file extension contain disk images that are used by the Microsoft Virtual Server. The VHD file stores data within an individual file and acts in the same was as a physical hard disk.
VHD files are commonly used to install multiple operating systems on a single hard drive and to test various software applications.
Click Start, type diskmgmt.msc and press Enter, then Click Action > Create VHD and you can now create a new virtual drive of your own (right-click it, select Initialise Disk, and after it's set up right-click the unallocated space and select New Simple Volume to set this up). Again, you'll be left with a virtual drive that behaves just like any other, where you can drag and drop files, install programs, test partitioning software or do whatever you like. But it's actually just this VHD file on your real hard drive which you can easily back up or share with others. Right-click the disk (that's the left-hand label that says "Disk 2" or whatever) and select Detach VHD to remove it.
