As Rob said it can be done (and is done frequently in some circumstances), but normally requires Linux. AFAIK you can do it in with
VMware but isn't likely to be free (or even reasonably priced, i'd guess).
You can create an
XP live disk. That way you boot up with the same, fresh copy of the OS off the CD. As no changes are stored, you don't have to worry about changes being made viruses etc. Also, I think you can choose what extra software is pre-loaded, but i'm not sure.