On a running virtual machine (under Virtual PC) you can see the optimization level being used by selecting 'Properties' off of the 'Action' menu - and then going to the 'Advanced' tab.  There are three possible optimization levels:

1. None: You should only ever see this if you are using the '-disableopt' command line option - and you would only ever want to do this for debugging purposes.
   
   
2. User mode optimization enabled: This is the default mode of operation for virtual machines.  User mode code (or ring 3) is run directly on the processor - but kernel mode code (or ring 0) is handled inside of a binary translator.
   
   
3. User and kernel mode optimizations: In this mode both user and kernel mode code is run directly on the processor.  This mode is only enabled on certain operating systems (windows NT, 2000, XP, 2003, Vista) once Virtual Machine Additions have been loaded.

Cheers,
Ben