I successfully made the conversion with thanks to Jake Oshins and Babul A. Mukherjee. Here's how I did it:
- Cleaned up the source machine - delete unnecessary files, defragment etc.
- Ran the latest Disk2vhd on the source machine making sure to check the Fix up HAL for Virtual PC box (I think this is a new feature)
- Copied the VHD file to the new host (running Windows 7 and Windows Virtual PC)
Because the source machine drive was 250GB (even though only 55GB was in use) Virtual PC was unable to open it so I had to perform these additional steps:
- Mount the VHD file on the host machine
- Resize the partition so that it's under 127GB and leave the remaining space unallocated
- Download VHD Resizer and shrink the VHD file so that it's also under 127GB
Then you should be able to use the drive with Windows Virtual PC under Windows 7.
Unfortunately the Integration Services don't fully/properly install as they're not supported on Windows Server 2003 R2, but it works well enough.