Windows XP VM can only be run if your version is Proffesional or Ultimate, not on the lower verisions of windows 7.
Link if you have the Prof or Ultimate Version:
http://www.microsoft.com/windows/virtual-pc/
Have you tried to install using the compatability mode. Right click the Intall program (exe) and select compatabilty mode and select the correct version, ie win xp Sp1.