I noticed that XP is now downloadable from the MS site here: http://www.microsoft.com/windows/virtual-pc/
Has anyone used it yet to run older PC games and is it worth downloading? Also does it simulate a 32bit version of XP under a 64bit version of 7? I only ask because I have spent the last few days installing a crapload of games but found a few are just too stubborn to install like XIII, Grim Fandango and Sonic R.

Never used XP mode, as my processor doesn't have hardware virtualisation (or whatever they're calling it), but according to everything I've read it's the 32-bit version of XP (actually, it'd be almost stupid to include the 64-bit version as it was never widely supported, not to mention that it's Windows NT 5.2 - same as Server 2003 - not 5.1 like XP 32-bit, which makes a load of applications go apeshit as they refuse to run on "server systems").
Though, given that hardware 3D acceleration is non-existent in Virtual PC, I doubt many (relatively) modern games will be playable. If 3D support is a necessity, try VMWare Workstation instead, it's not free, and the 3D acceleration probably isn't as good as one might hope (but as far as I know, it's the only virtual machine that at least TRIES to do HW 3D acc - the free products VMWare Player and VMWare Server does not, I'm pretty sure), but you can still see how you like the 30-day trial.

I've used it a bit and it is 32 bit but more or less useless for games as Miaghstir says due to the lack of 3D. If you are running non 3D games I'd expect them to work however. You could prorably run something like Grim Fandango in software mode but there is no chance with the other 2.
If a game won't install in Win7 you might be able to use it to install the game in VPC, then copy it over to your Win 7 installation. I spent a while trying to get System Shock 2 running a few months ago and eventually managed to get it going in 64 bit Win 7 like that. I tried VMWare also before I got it running. The hardware acceleration worked as such but it was far too slow to be playable even on a brand new i7 PC.
If you have a copy of XP you are much better off setting up a dual boot system - its by far the best way to play the older games. It's not that difficult to do and there are a few tutorials around on the web.

If you want to run a virtual machine with 3D hardware acceleration, i suggest to look at VirtualBox. It has support for that and it's decent. Maybe better in the near future.

DOS= Use DOSBox or use VPC if your computer is too slow for the games you want to run in DOSBox.
9x= Use VPC. No other solution is better
2000+= Use Vmware or VirtualBox in that order. If you don't want to pay (you really should becaus eit's worth it) for Vmware you can use Vmware Player/Vmware Server but they may lack the features you need then use VirtualBox.

Send a report to Microsoft and get a replacement, 'tis free.

I rang Microsoft and they wanted €130 for another activation. Screw that.

I've only had trouble with VirtualBox (although I've been using VirtualPC and VMWare for much longer, so I know my way around them pretty well, unlike VirtualBox), but given that it's free, it's worth checking out, especially if it supports hardware-accelerated 3D as you say, and as it seems to support running apps from the host and virtual machine side-by-side (like Unity in VMWare, XP Mode in VirtualPC [depending on hardware and host OS] and Coherence in Parallels).
I'll have to try it out again.

Some months or a year ago it was not that good. But I tested it recently and it got a whole lot better and stability has hugely increased. I can even run Ubuntu with compiz at full effects in VirtualBox !