Creating a VHD from an Installation CD
To create a bootable VHD from the Windows 7 install CD, you will need to locate the main WIM file which is in the sources directory of the DVD –> E:\Sources\Install.wim
With this WIM file you will have to use the WIM2VHD utility, which is script file to create the VHD.
From an Administrative command Prompt, The command line will be as follows
CSCRIPT wim2vhd.wsf /WIM:E:\sources\Install.wim /SKU:ULTIMATE
This will create the VHD file in the current directory and now this is ready for use.
you can create a Boot entry for this VHD as mentioned in my earlier blog
Note : Booting from VHD is only supported on Windows 7 Enterprise and Ultimate Editions. It is supported on all Server 2008 R2 Editions.
If you do create a VHD for any other Edition of Windows 7, it will start up as normal and just before the login screen it will display an Error message as follows
License Error.
Boot from VHD not supported