I´ve written about virtual computers before and found a nice way program to make the same method available for virtual software installations. Altiris Software Virtualization Solution lets you install every kind of software in a protected environment that prevents the software from accessing other applications or files of the Windows operating system. This is great if you want to try out some new alpha / beta software or software that you are suspicious about, as it protects your system from issues or attacks.
The software is free for personal use and can be setup with ease. What the software does is the following, it creates a layer for the software that you want to install and emulates the surrounding operating system. Everything the newly installed software does is now done inside this layer and not in the underlying operating system.
Update: Symantec has bought Altiris and integrated the company’s product line. The program is now know as Symantec Software Virtualization Solution (SVS). Information about the products are still available on the Symantec website.
A free version is unfortunately no longer offered by Symantec.
Update 2: The product’s name has been changed again to Symantec Endpoint Virtualization Suite. The program is only offered to small business and enterprise customers of Symantec. Key features of the program are application virtualization, on-demand application streaming, desktop connection brokering and data-on-demand services.
Desktop users looking for alternatives can take a look at Sandboxie or Returnil
for functionality that is similar to that provided by Altiris’ Software Virtualization Solution.
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Cameyo, Free Windows Application Virtualization
Windows 7 Patch Removes Hardware Virtualization Requirement Of Windows XP Mode
How to Install XP Mode on Windows 7 without Virtualization

Sandboxie
http://www.sandboxie.com/
does something simmilar,originally I thought it was for sandboxing IE only but it works with other software as well
SVS 2.x free for “only 120 days” :-(