Step 1: Figure out which virtualization software you are going to use. Windows XP Mode (free if you have Windows 7 professional, enterprise or ultimate), Oracle VirtualBox (free), VMWare Player (free) or VMWare Workstation (not free).
Step 2: Install the software of your choice
Step 3: Create a new virtual machine using the programs wizard
Step 4: Either install from a CD/DVD or install directly from an ISO file.
Step 5: Once installed, install the virtual machine additions
Step 6: Patch your Windows virtual machine, be sure to run an AV