Download Virtual Server from Microsoft. You might be able to do it with Virtual PC too. Install it.
Then you have to walk through creating a new VHD. Set the size of the VHD, resources, etc. You'll understand when you walk through it.
If you have an ISO of your install CD/DVD, that works best to install. Otherwise you can mount your installation CD/DVD into the VHD and install like normal.
Your CPU will need to have virtual support. Most likely it will if it is only a couple years old.
Search on Technet.microsoft.com and you can get all the steps you need.