Hi darren.
I'm sure some of the members have given Time Freeze a whirl, and if I recollect correctly, without any particular issues. But don't rely on my recollections, as I can remember things which never even happened.
I've been running a similar application, Returnil, for a long time now, and if you're not careful in following installation instructions with this type of program, you can cause issues.
For example, I once tried to update Returnil without removing the previous version first and rebooting, which was my bad as that point was clearly laid out at the time as a no no, and the only solution I found for the screw up I caused myself was to restore a Macrium Image.
I also stayed with Returnil 2008 version, as the program became more complex with built in Anti Virus software which I didn't want.
Used and installed correctly, Returnil is a first class virtualization application, and runs problem free for me with my XP SP3 system, and for anyone interested there are very few downloads out there for the 2008 version, but there's one in my signature. It's a free version of course.
Regarding your hard drive, I have Returnil set up to use memory cache and not disk cache to clone the operating system, so it's actually using very little hard drive space. Maybe a little of the Paging File, but I think XP does that regardless of how much memory is available. (Unless you disable the Page File)
Virtualization is great, but installation has to be followed exactly, and I wouldn't try any of them without the protection of a System Drive Image to fall back on.
Hope that helps.
EDIT: Ninja'd by Tom.