I use my old XP drive to boot from in order to run some old software which is not compatible with my Windows 7 system. (I unplug the Win 7 drive and plug in the XP drive) If I install Virtual PC 2007 can I make the 'old' drive one of the virtual machines
without reinstalling XP or the applications?
Not directly. A virtual machine does not boot from a hard drive. It boots from a .vhd file which is a file on your system which looks like an HDD to the virtual machine.
There are various programs which will convert a existing HDD to a .vhd file. In a case like that the Sysinternals disk2vhd should work for you. You would convert your HDD to a .vhd file, then create a new virtual machine using an existing .vhd .
You may be lucky and have it boot up without problems, but you may need to do a repair install of the OS. The reason for this is that the "hardware" of the vm is not the same as the "hardware" of the physical machine and you may need different device
drivers. Using the checkbox in disk2vhd about drivers (I forget the exact wording) will help your chances of success.