Creating a VM is just equivalent to buying a new physical computer with a CPU, memory, an empty hard disk, one or more network interface cards and other peripherals. You can use that computer as a paper weight at the most unless you install an operating system on it…

1. Allowing you to mount .ISO files instead of inserting real CDs or DVDs to the real CD/DVD player of your host machine. Therefore you do not need to physically burn the installation media, you can keep it as an .ISO file for ease of use. For instance, if you have MSDN access and have downloaded the OS you want to install, you can keep it in the .ISO format and mount that file to the VM's CD-ROM drive.
    
2. Also, using VMs allows you to temporarily "freeze" the installation process and continue it in a later time.

On the other hand, installing the new OS on the new VM takes longer because of the performance issues on the host machine.

Installing the new OS on Virtual PC 2007

1. First thing to do is to boot the guest machine. Just select the VM from the list of the configured VMs and click Start.
   
   
    
2. When the VM boots you can notice that it "sees" the amount of physical RAM that you allocated to it during the VM's configuration. Also, it "sees" one virtual hard disk, but you can configure up to 3 in the VM's settings.
   
   
    
3. Since there is not OS installed on the VM's hard disk, it will proceed to trying to boot from the network. In most cases it will not succeed, unless you have some sort of RIS or other PXE-based network booting system set up on your network.
   
   
    
4. In the VM's main window, click CD and then Capture ISO Image and browse to the .ISO's location, or insert a real installation media in the host's physical CD/DVD drive.
   
       
    
5. Reset your VM by pressing RIGHT ALT+R, or clicking on Action > Reset. Acknowledge the prompt.
   
       
    
6. After the VM is reset, the setup process will begin (in some cases you will need to press any key to invoke the installation process).
   
   
    
7. Continue installing like you would do with a real machine.
   
   

It is beyond the scope of this article to deal with the actual installation of the OS, but you can consult my other articles that deal with installing real machines in case you are not familiar with the installation process: