Actually Virtual PC can't run anything on its own. After installing Virtual PC you usually need to install an operating system using your purchased CD/DVD. For Windows 7 owners Microsoft gives for free a Windows XP license through the Windows XP Mode package. Installing XP Mode does nothing more than installing a virtual HDD (.vhd file) on which Windows XP is already installed.
I think Microsoft did this just because the "Run this program in compatibility mode for..." option doesn't really work - at least for me it didn't.