I am wondering if i have a questionable peice of software that may contain a virus or what not if i can use XP mode as a sandbox to test it so that if it does it will not afect my Computer.
Welcome seulater to the windows 7 forums.
Yes, you can but it is recommended that you backup your .vhd file which is the virtual hard disk for windows xp in virtual pc.
Make a copy of the .vhd file in someplace other than it's default location and then when you have thorougly screwed up you windows xp virtual machine, you can then just copy the .vhd you had saved over the top of the regular one. One caution is that you must shut down the virtual machine and not hybernate it.
As always, It might be a good idea to have an image backup of your system just as as warm fuzzy.
Rich