I have a Windows 7 on a PC, but I want to install Windows 2008 R2 on the computer. I also want to keep Windows 7 on as a VM.

Can I use disk2vhd? http://technet.microsoft.com/en-us/sysinternals/ee656415.aspx

Can I create a windows & full backup and restore it on Hyper-V?

Please let me know what will work best and if you have any other suggestions.

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Yes, using Disk2VHD will allow you to create a VM from your physical machine, you can create this, move the image off the machine, install server 2008 R2 and Hyper-V role, then import the Windows 7 VHD.

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