Recently, SysInternals introduced Disk2vhd.
This is a tool that generates a VHD (virtual hard disk image) from a physical disk.
Even better: it can do this for a running system that is online!
They use volume snapshots (a.k.a. Volume Shadowcopy Service) to do this on-line.
From their site:
Disk2vhd is a utility that creates VHD (Virtual Hard Disk – Microsoft’s Virtual Machine disk format) versions of physical disks for use in Microsoft Virtual PC or Microsoft Hyper-V virtual machines (VMs). The difference between Disk2vhd and other physical-to-virtual tools is that you can run Disk2vhd on a system that’s online. Disk2vhd uses Windows’ Volume Snapshot capability, introduced in Windows XP, to create consistent point-in-time snapshots of the volumes you want to include in a conversion
Note: Sysinternals now has a Live Share at http://live.sysinternals.com where you can download the most recent versions of their tools.