Recently I did conversion of windows 2000 sp4 server to the VM on Microsoft Virtual Server 2005 R2 sp1. Here are steps:
Create a blank VM with fixed disk. The disk size should be enough to accommodate all partitions of the physical server.
Create an image of system partition (c: -drive) of the physical server using an image software - I did use Paragon Drive backup 8.51 Server edition. Copy the image to a network share (do not use a domain controller share)
On virtual server host insert paragon recovery CD and restore the C: partition to the new VM created in step 1.
Now we need to replace HAL on VM, insert OS CD in my case windows 2000 sp2 and run repair (non-destructive) on windows installation.
After repair the VM OS should start (start it without network connection) - remove it from domain and change IP address. You need to apply all windows service packs and updates, which was on the physical server.
Now (if applicable) you need to create additional partitions with same drive letters as on old physical server (in my case e: and g:), the size of the partitions is not important as long it will be bigger as used space on the old server.
After that copy folders from the old server partitions to the VM partitions and it should restore all previous shares.
Basically we done, but remember until it is finished start up of VM might be painfully slow - sometimes 20-25 min. And it is recommended before doing image disable all unneeded services and remove unneeded applications, antivirus and network teaming.