It sounds like you have followed the proper process for adding a VHD to VM1. You can attach the VHD to either an available IDE channel or to an available SCSI channel (if you have added a SCSI adapter). I think the problem you're experiencing is that the disk is not formatted and therefore does not have a drive letter for use by the guest OS. If you're using Windows, you'll need to open the Disk Management tool (accessible via the System item in Control Panel or by right-clicking on the Computer icon and selecting Manage). Then, choose to format and partition the disk. That should make it available for use.
You can use Virtual Server's COM API to automate the creation and attachment of VHDs. I have written a book titled Scripting Microsoft Virtual Server 2005 that provides VBScript, VB.NET and C# source code. Also, see my scripting/automation article, using VBscript to automate Microsoft Virtual Server, on SearchServerVirtualization.com for an intro on getting started.
Finally, I have a sample C# application available for free download on my website anildesai.net. Good luck!
This was first published in February 2008