Moving to Windows 7 but keeping my XP

"Whilst you can move XP to a Virtual PC, you might run into licensing/activation issue. It is possible the Windows Key is BIOS locked and won't work in a VM session. And other keys such as MSDN or upgrade didn't work on the installed version of Windows.

I was told by Microsoft (or the folks on the activation line) that I needed to buy a retail copy of Windows and re-install it (which sort of defeated the purpose).

So when I moved from Vista to Windows 7, I re-partitioned my drive and did it that way."

"I think the easiest way would be to partition the disk and move Windows XP to a secondary partition, like you suggested. Because it costs the least time and will ensure Windows XP will keep on working in a full-blown fashion, not virtualized.

The first guide seems to coincide, with what's mentioned in the Virtual PC Guy's blog post named in the other answers.

Try this guide:

Boot from Windows 7 fron a USB Key; Run some diskpart magic wrapped up in a script to calculate the values shrink-and-clone-to-another-volume

diskpart

select disk 0
select volume 1
Shrink desired=28500 (where 28500 is ~15% larger than the data on the harddisk)

create partition primary
format fs=ntfs label=VHD quick
assign
Create vdisk file=E:\WINXP.VHD maximum=79999 (where 79999 is the size of the original physical disk)
Select vdisk file=E:\WinXP.VHD
attatch vdisk
create parition primary
format fs=ntfs label=WinXPVHD quick

clone Windows XP into the VHD
format the old C: and install Win7 to physical disk
Move out the VHD and collapse the last partition

One of possible tool to use is to install WAIK.

Capture an Image

ImageX is a command-line tool that enables the creation of Windows Image (.wim) files for deployment in a manufacturing or corporate IT environment. By using the imagex /capture command, you can capture a volume or partition to a .wim file. Once you capture your image, you can modify and apply the image either to a network or individual destination computers.

You can compress and capture your image file from Windows PE, Windows Vista, Windows XP with Service Pack 2 (SP2), Windows Server 2003 with Service Pack 1 (SP1), or a customized Windows PE provided by Microsoft Systems Management Server (SMS) Operating System Deployment Feature Pack or Windows Deployment Services (Windows DS).

Use wim2vhd to create a vhd

The Windows® Image to Virtual Hard Disk (WIM2VHD) command-line tool allows you to create sysprepped VHD images from any Windows 7 installation source. VHDs created by WIM2VHD will boot directly to the Out Of Box Experience, ready for your first-use customizations. You can also automate the OOBE by supplying your own unattend.xml file, making the possibilities limitless.

Fresh squeezed, organically grown, free-range VHDs - just like Mom used to make - that work with Virtual PC, Virtual Server, Microsoft Hyper-V, and Windows 7's new Native VHD-Boot functionality!"