After taking successful full backup of Windows 7 machine with Simplified Disaster Recovery (SDR) and try to convert the backup set into virtual image (P2V) the convert button is grayed out.
This would happen when a SDR backup has not yet been performed for the server or if the machine backed up is a workstation.
Conversion is not supported for non-server operating systems ie. workstations like Windows 7, Windows XP and Vista.
Perform an SDR backup for supported server operating systems.