On VMTN, a whitepaper can be found that describes how to configure VMWare ACE as the user's primary desktop environment. Basically, VMWare ACE is automatically started in fullscreen mode when the user logs on to the machine. The user does not interact with the host machine.
It is an interesting concept that has some advantages. The main advantage is that the underlying hardware of the guest is always the same. That makes deploying the os, patches and applications simpler. Because of the many ACE policies you can set, you can prevent copying the virtual machine to another location. ACE also includes a packet filter so that network access can be restricted on the host and the guest. In addition, the virtual machine can be set to expire at a certain date.
According to information in this document, it should be ok to run another copy of Windows XP (or 2000) in a virtual machine while Windows XP is used as the host as long as you have some kind of volume licensing agreement. Better doublecheck with Microsoft before you think about deploying a VMWare ACE solution though.
