I have received a fair amount of email about my home network upgrades, particularly on the virtualization side of things. One of the most frequently asked questions is "How do I convert physical to virtual?". That is usually followed up with, "Oh yeah.....how do I do it for FREE!?".
First, I have made the decision to do manual conversions. I am going to manually build VM equivalents of existing physical machines because the machines have a bunch of stuff on them that I don't want or need to keep. I want to clean up the installs so going manual works for me. If I were converting a bunch or servers in a business then I would want to automate things. To do that.....
The most recent and up to date Microsoft toolset for converting P2V is the P2V wizard that lives in the System Center Virtual Machine Manager 2007(SCVMM) product. This toolset won't convert legacy Windows OSes though (Win 9x, NT4) or 64 bit systems. For that you will have to wait for SCVMM 2008 or go grab the Beta now. But it does help automate the process substantially. There are even PowerShell scripts that can assist with this. Downside = $$$$. SCVMM is not a free product.
If you want to do free conversions though, you can grab the Virtual Server Migration Toolset (VSMT). The downside with this tool is that it does not support converting 64 bit machines or Windows Vista or Windows 2008. For that you will have to go with SCVMM or 3rd party.
In short, there isn't a unified toolset that converts everything yet. When SCVMM 2008 releases we will be as close as we will get.