Creating a virtual lan

Hi Techies ,
Can I install and test a virtual lan as per following configuration
1. Setup s XP pro system with VMware and run – Server 2003 enterprise, 3 different win xp pro instances(virtual machines)
and than use this a test lan setup in absence of physical hardware ?
2. Or setup server 2003 enterprise and than install 3 xp pro virtual machines over it for imitating a small lan setup for testing an application running from the xp clients ?

Is it possible ? Has any one done this sort of thing ever ?

Plz help ..
Regards
V@rinder

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