It is highly suggested you test this on a throw-away virtual machine. While it appears to work fine for me there has not been enough testing across different service packs and Windows operating system versions to make any stability claims.
THIS SOFTWARE LOADS KERNEL DRIVERS AND MUNGES NETWORKING! YOU HAVE BEEN WARNED! :P
The current alpha versions of Tor VM do not protect the host against a number of privacy compromising protocols and services. Do not rely on this build for anything but experimental testing!
Windows XP with any service pack is best. In theory this should run on Windows 2000 too. It might have issues with Vista, and definitely will NOT work on any 64bit versions yet.
A wired ethernet connection is most likely to work well. There are some known issues with certain wireless network drivers and bridged WinPcap support.
Grab the latest Tor VM zip file at:
File Length : 4,177,523 bytes (4 MB) SHA-1 Digest : 7509cd4c087fd5de9ab22e7a761d0c730d0c5ecf
Extract the zip archive and open the Tor_VM folder. Double click the onion:
A console window will appear and scroll a few lines during startup.
A new window for the virtual machine should appear. If this does not open after a few moments there may be issues with networking. Two log files are present in the Tor_VM\state\ folder that may help identify the problem.
It may take a little while for Tor to bootstrap into the network. Be sure that you have network connectivity to the Internet from the Windows host before launching Tor VM.
You should see progress indication based on the steps completed for bootstrapping Tor into the network.
Once Tor has successfully bootstrapped into the network a list of transparent proxy targets is shown. This only shows redirected connection establishment, and not all traffic.
Both network interfaces should be up. You will see the bridged ethernet adapter sending and receiving frames, however, none of the bridged device traffic is sent to or from the host IP stack.

Verify that you are using Tor via the Tor Check Service at https://check.torproject.org/.

DON'T USE INTERNET EXPLORER FOR ACTUAL ANONYMOUS USAGE! DEMO ONLY!
You can also verify that .onion sites work to confirm proper transparent DNS proxying.
NOTE: .exit syntax has been disabled in Tor VM.
The control port is available on the private Tap adapter interface for use with Vidalia or any other Tor controller. See the design document for details on how the control port communication will be managed in the functional release. For testing purposes a static control port password of "password" has been set.
The standalone Vidalia binary can be downloaded at www.vidalia-project.net. Current version:
During installation unselect the "Run at Startup" option.
The first attempt to start Vidalia will encounter errors. Select "Show settings" to configure the control port.
Disable start Tor when Vidalia starts option. You can ignore the tor.exe path setting as it is not used.
Set the control port address to the Tap interface IP as shown in the virtual machine console.
Click on the close box at the upper right of the "QEMU (Tor VM)" window. When the virtual machine exits the controller process will restore your network configuration back to the way it was.
Wait for the shutdown process to complete before changing network interface settings or re-starting Internet connected applications.
Please don't spam the Tor mailing lists with questions or feedback. I can be reached at coderman at gmail dot com if needed and will be happy to help when I can.