Yes, that is possible and it -does- work.
However, I once ran into the problem that an OEM version of XP demanded a re-activation after booting in Parallels 2.5. Unfortunately, it demanded the re-activation while Parallels was still installing its drivers, and that in turn led to a broken XP installation. I had to format the partition and start from scratch.
I do not know if this can still happen with the current 3.0 version of Parallels, but it certainly never happened to me with a corporate version of Windows XP.
However, I once ran into the problem that an OEM version of XP demanded a re-activation after booting in Parallels 2.5. Unfortunately, it demanded the re-activation while Parallels was still installing its drivers, and that in turn led to a broken XP installation. I had to format the partition and start from scratch.
I do not know if this can still happen with the current 3.0 version of Parallels, but it certainly never happened to me with a corporate version of Windows XP.