Microsoft's free Sysinternals Disk2vhd utility creates a Virtual Hard Disk (VHD) image of a physical disk drive for Microsoft Virtual PC and Hyper-V virtual machines. It's built on the Volume Snapshot capability introduced in Windows XP. Disk2vhd uses this capability to create accurate "snapshots" of disk volumes selected for conversion. Disk2vhd can also create VHDs on local volumes, even those that are being converted. It preserves your disk partitions and only copies the data on selected disk volumes, which lets you convert only system volumes while excluding data volumes. The biggest difference between Disk2vhd and other disk virtualization tools is that Disk2vhd works on online systems.
This compact tool downloads as a self-extracting compressed file that runs upon opening, so it's portable and has a wide range of potential uses, including a command-line option. The tool's interface is nothing more than a small dialog listing the target system's disk volumes with checkboxes to select below an entry field for the VHD disk name and directory. Create, Cancel, and Close buttons are the only controls, except for a Help button and a link to the developer's site. You simply check the volume to image, create a destination, click Create, and the tool does the rest, displaying a green progress bar as it works. We chose a Vista installation to image; a 150GB physical volume required 45GB of disk space for a VHD and took no more time to create than a thorough backup. To use VHDs created by Disk2vhd, you simply need to create a virtual machine and add the VHD to it as an IDE disk. Be careful not to attach a VHD to a system you plan to boot from or Windows will change the disk signature.
Disk2vhd works in copies of Windows XP SP2, Vista, and 7 with Software Assurance. It's free, and it simplifies the process of creating VHDs for VMs in Windows.