Does anyone know a (free?) way to have a fully encrypted local-disk (no NFS,iSCSI,FC) VMFS inside the hypervisor itself? I am using ESXi 4.1 U2.
There's no way (yet) for the actual VMFS datastore to be encrypted, it's just not part of the VMFS3 spec, nor is part of the VMFS5 spec as far as I know. That said there are some Brocade parts that will allow for 'on-array' encryption without any knowledge of this by the hosts themselves, plus there are some ways that they can do over-the-fibre encryption that I know work with Windows and Linux but I'm not sure the same support is there for ESX/ESXi.
By the way we tend not to discuss unreleased code on serverfault as the site's about professional production systems and we generally feel that running unsupported code in such an environment is inherently unprofessional. Just for future notice.