long diskSize = 30 * 1024 * 1024; //30MB
using (Stream vhdStream = File.Create(@"C:\TEMP\mydisk.vhd"))
{
    Disk disk = Disk.InitializeDynamic(vhdStream, diskSize);
    BiosPartitionTable.Initialize(disk, WellKnownPartitionType.WindowsFat);
    using (FatFileSystem fs = FatFileSystem.FormatPartition(disk, 0, null))
    {
        fs.CreateDirectory(@"TestDir\CHILD");
        // do other things with the file system...
    }
}