Yes you have to install an OS on it. I dont have Virtual PC installed right now so I cant give you a step by step but its really rather easy.
EDIT: I found this:
VirtualPCEvalGuide.doc
Installing Operating Systems on Virtual Machines
Installing an operating system on a virtual machine is very similar to installing an operating system on a physical computer. The setup program of the operating system installs components based on the hardware configuration of the virtual machine. Users should keep in mind that the hardware of a virtual machine is emulated and may differ from the hardware of the physical machine. The operating system installed on the virtual machine must include drivers for the emulated hardware.
To install the operating system, users must have the following:
A virtual machine on which the operating system will run. Users can use the New Virtual Machine Wizard to create a new virtual machine or add an existing virtual machine to Virtual PC. More information can be found in the previous section, “Creating Virtual Machines and Installing a Guest Operating System.”
A virtual hard disk on which the guest operating system will be installed. Users can create a virtual hard disk by using the Virtual Disk Wizard or when they create the virtual machine using the New Virtual Machine Wizard. More information can be found in “Creating virtual disks” in Help.
After creating the required components, users can install an operating system to run on the virtual machine.
To install an operating system on a virtual machine
Open the Virtual PC Console on the host operating system by clicking on Start, pointing to All Programs or Programs, and then clicking on Microsoft Virtual PC.
If the Virtual PC Console displays more than one virtual machine, click on the virtual machine on which you want to install the operating system.
From the Action menu, click on Start.
When you receive a prompt to reboot and select a proper boot device or insert boot media in the selected boot device, insert the Startup or system disk, CD or DVD into the appropriate drive, and then follow the instructions in the operating system’s setup program.
Note that guest operating system licenses are not included with a Virtual PC license. Users must ensure that they are appropriately licensed for all operating systems that they install on a virtual machine.
It is possible to perform a network installation of an operating system on a virtual machine. Virtual PC does not support booting directly from the network to perform a network installation; however, users can use a remote boot disk that includes the appropriate instructions for contacting the network installation point.