I use VMware Workstation 7 and do pretty much what you're thinking of - on my notebook I run Windows 7 64-bit host, and install very little software on the host - I do everything in virtual machines.
I have my Windows 7 (also 64-bit) virtual machine with all my various software and Windows development tools.
I have another Ubuntu VM with other Android dev tools.
I will frequently create a temporary VM to try out some software - so I don't pollute my regular machines (VMs) with software and then removing it. After trying it, just delete the temporary VM.
I have had additional VMs for work (yet another different toolset), including running multiple VMs with a "internal" (within VMware) network so I can simulate multiple machines talking to each other.
I actually started using virtual machine when I had multiple toolsets and was concerned they'd interfere with each other. (it's happened in the past)
Mostly it works well - I only have 4GB in this notebook and that's a limitation - I can easily run one VM at a time, but running multiple VMs means I have to limit the RAM in those VMs. Occasionally something bangs away at the disk and locks up the machine for 30 seconds to even several minutes. Firefox can cause that - I have a tendency to open hundreds of tabs; eats memory and things go haywire for a while.
I'm envious of your 16GB RAM! what machine did you get? No budget for one right now, but eventually... (other than memory, this notebook works very well - big screen, 2 hard drives, etc)
VMware released Workstation 8 recently - I'm considering whether to upgrade or switch to VirtualBox.