When running Windows XP Mode from Win7 Pro, can it infect the host system (the Win7 OS); can viruses jump from the VM to the host system?
You're asking a few different questions here. Since you're all using the same network, it could infect your host that way and unless you mount the HD from within the VM, I'd have a hard time believing it'll propagate through there, unless it actually takes advantage of some flaw in VPC.
Additionally, is there a way that I can block the VM from seeing other computers connected to my router (including the host PC), but still allow it Internet access?
You could put it on another subnet.
Basically I'm testing software... some of which may be questionable. and as of right now, I've got two options: a VM or another computer. Only problem is that I don't actually have an extra copies of Windows around, so if I go the route of another computer, it's going to cost at least a few hundred dollars. Speed is not an issue, which is why I'm looking into the Windows XP Mode, that and it's free and works for Win7 Pro and Ultimate users.
I'd probably just load 7 without a key and work with that for the next 30 days.