Shades is right. You can fairly easily turn an existing copy of XP, including software, into a VM -- Paragon & Microsoft both have tools -- but to say it can be sluggish as a VM would be a gross understatement. Installing XP fresh is only a bit better. Running the modified version of XP that Microsoft uses for win7's XP mode helps a lot, but it's still way underpowered from the real thing. On that netbook I doubt it would even run well enough to consider it useable.
cranioscopical is also right -- move directly to 8.1. Why? Microsoft is trying to get 8.1 to run on just about anything more powerful than a calculator. You can for example run off a wim rather than have the full, expanded file setup -- that was developed just because of situation's like your wife's netbook with little storage. 8.1 also has better memory use/handling than win7, which you're going to need.
That said, perhaps the best solution would be none at all -- XP will still work without the monthly patches. Second to that, rumor has it that in the future Microsoft will have their own version of the Chromebook -- basically low powered hardware that runs software on a server.
