The description basically says that for a cost of stability, virtual machine increases the decks software capacity by 2. However, given that it is software does it take up a software slot, essentially only increasing the software capacity of the deck by 1?

Yup, that sums it up.

Oh, and that you take one more point of unresisted Matrix damage whenever you get hit by such an attack for being able to run one additional program.

No benefit without a cost.