A Virtual PC is an entire operating system running inside another operating system. This means you could boot your computer up into Windows XP, and then run VirtualPC or VMware to have Windows 2000 or 98 or Linux running in a window (or full screen), without having to reboot or anything.
It runs a "virtualization layer" such that hardware devices are emulated by software, and, as necessary, translated/relayed to your actual hardware. It's a pretty cool way to provide support/walk-throughs for other operating systems, test potentially unstable, or even malicious software, or just mess around with another OS if you don't have another machine handy. It should also be noted that VirtualPC had a good foothold in the Mac market, and actually performed the additional function of non-natively emulating an x86 environment (ran on PPC), but the additional overhead resulted in rather crappy performance. Still, it gave the maclots a way to actually use popular software :P. VirtualPC was purchased by Microsoft within the last few years. VMware has always been my preference. (P.S. it also runs in Linux.)
Edit: Oh. I also feel that I should note that it's becoming somewhat popular for businesses to run multiple servers as virtual machines on one physical machine.