You can do it that way, or just run the executable (.exe). What error did you get when u did that?
To create that new VM, open up the Virtual PC
Start > All Programs > Windows Virtual PC > and click on "Windows Virtual PC" to open the Explorer Window.
And in the task bar, click "Create virtual machine".
BUT FIRST you gotto convert your XP SP2 install to a .VHD first. Make sure all devices and programs are work the way they suppose.
Do this first then we can go thru the creating new virtual machine.