Windows 7 comes with a special piece of emulation software known as XP Mode.
http://windows.microsoft.com/en-US/windows7/products/features/windows-xp-mode
Basically, XP Mode is a legal fully activated, verified image of Windows XP SP3. You can use the default Windows Virtual PC and install this image to make it work in Windows 7. You used to require Intel VT technology in order to use this, but that had been patched recently.
Make sure you download all components if you decided to use the default Windows Virtual PC
http://www.microsoft.com/windows/virtual-pc/download.aspx
Although somewhere in the EULA is stated that you can only have 1 Windows XP Mode running, well technically you can have many copies (and only run 1 copy at any one time if you really feel bad about it). Some copying and editing is required, but a cool new tool can XP-More allows you to manage those images by Windows Virtual PC easily.
http://xpmore.codeplex.com/
Now, here is the good part. If you are using VMWare, then life gets simply. You do not need the Windows Virtual PC packages. All you need to install is "XP-Mode" from Microsoft which is about 500MB of download. Just choose Import XP Mode from VMWare and it will make a new VM with the installed XP Mode. And you have 1 fully working and legal Windows XP VM. And technically making multiple copies of a VMWave image is not against the EULA because that doesn't cover a 3rd party application such as VMWare and you are not really making copies of XP Mode, but rather copies of VMs. I know it sound crap, but that entirely up to you. It doesn't mean you will go to heaven if you do not use VMWare... :)
So, why is XP Mode good? It passes all the Windows Genuine Advantage (WGA) and legal checks. You will be able to run Windows Media Player, Microsoft Security Essentials and other stuff that require an original Windows. BTW, if you do need a free anti-malware, Microsoft Security Essential is one good option. While XP is being phase out because it cannot run IE9 or Live Essentials 2011 etc, it is probably still pretty good for testing of many applications in a controlled environment.
So stop struggling with all the "corp" version of Windows XP or those that require constant cracking of WGA every few months! Go Legit! Use XP Mode!*
*XP-Mode require you to verify that you are using a legit copy of Windows 7 before they allows you to download. Guess that one good point why you should buy a legit copy of Windows 7!
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