We have been using Virtual PC at work for testing software.
What does it do? When you run it, you see a window on the screen that thinks it is a whole real computer. You can start with a "virtual hard disk" created by someone else or start from scratch and install an operating system yourself.
A virtual computer is useful for running software that does not run on your computer normally (because it is designed to run on a different operating system) or for testing software in various ways that you don't want to arrange on your real computer. For example, we want to test our software on a "clean" machine that has never had any of our software installed on it before. We could install a fresh copy of Windows each time we test, but that would be inconvenient. Instead, we have two "clean" virtual machines (one for XP, one for Vista) which we install our software on to test it. (Installing our software means it is no longer "clean" so we start with a fresh copy of the clean machine each time.) We used to do something similar by copying an entire "clean" hard disk image and booting it as a real machine, but it is more convenient to manage the virtual machine images and only reboot the virtual machine each time.
I have a new iMac at home which usually runs OSX but also has Windows 7 Home Premium installed. When I first tried installing Virtual PC, I found that the current version is specifically crippled so it will only run under the more expensive versions of Windows 7 (Professional and Ultimate.) I was stalled, trying to decide whether to upgrade or just skip being able to use this software at home, but finally I found that the 2007 version of Virtual PC runs fine on Home and does everything I need.
There are several similar products like VMWare and VirtualBox, but the virtual machines I am using for work are built for Virtual PC.
The next level of the rabbit hole will come when I figure out how to start my Windows 7 partition as a virtual machine while running OSX...