I would like to setup a clean instance of Windows 7 running on a virtual PC that is hosted on a Windows 7 box. Do I have to install a Windows 7 VPC on a virtual Windows XP box?
I need to test an application from the install up.
You can do that easily with VirtualBox Just install VirtualBox on your Windows 7 PC, and create new Virtual Machine where you would install Windows 7 for testing.
This way your current Windows 7 installation would act as a host, and you can install any OS you need using Virtual Box.
Another great tool to do this is VMWare
You could also try to use a sandbox via "Sandboxie". It is free and creates a region which is isolated from your OS. Therefore you might not need to install the hole OS on a VM.
Here are the steps I used to setup an instance of Windows Virtual PC that runs Windows 7 on a Windows 7 box.
Download an ISO of the Windows 7 (x86) from MSDN.
Start a new Windows Virtual PC instance
Open settings for the newly created Virtual PC instance. Click the "DVD Drive" setting. Click the "Open an ISO image" radio button and Browse to the ISO image downloaded in step 1.
Open the Virtual PC. A new Virtual PC will be installed.
You can do that with any virtual machine software that supports Windows, including VMWare and VirtualBox. Interestingly, you can also duplicate your host Windows 7 system by creating an image of your system drive, then mounting the image in a Windows 7 virtual machine and booting from it.