I would say no. I'm pretty sure the VM is going been see as totally different hardware, which means you would need a new license, because its not going to let you re-activate that XP. Its not worth paying for it, if you have Win7 Pro or Business because they come with XP Mode with a free license.
You MOST DEFINITELY CAN create Virtual machines from Physical ones and Physical machines from Virtual ones.
The two processes are known as P2V and V2P.
Physical to Virtual (P2V) is quite simple -- you can backup your real machine with something like acronis true image, power on a base XP vm with nothing installed other than the OS and then do a Universal restore into this virtual OS. You'll get loads of "new Hardware found" after bootup but the acronis universal restore does a tremendous job of this. You do need to initially create a base empty (i.e no extra apps installed) XP vm guest first.
The reason for creating the base empty XP guest system first is that your current XP system is likely to have SATA drives. The default vmware "virtual Bios" will have drives as either SCSI or IDE. If you simply restore your XP system boot will BSOD (as it will on a REAL system if you try and boot with IDE instead of SATA or SATA instead of IDE).
The Acronis Universal restore program will sort all this out and use the "virtual hardware" from the "base vm" when copying over your physical installation. You won't be able to run things like movie playing / TV cards on a vm currently however but sound will be just fine.
(Of course you can't install a PHYSICAL system with the wrong disk type as Windows won't find any disk drives to install on - but if you HAVE an installed system then the system will attempt to boot (you've got the boot MBR on the disk) and then it will fail).
Virtual to Physical is a bit more complex as you need a folder containing some of the drivers that won't exist in the basic windows setup such as SATA drivers, chipset etc. etc.
Take a look at the VMWARE site for example and search on VMWARE CONVERTER.
These processes are run a LOT in the real design world.
When clients sign up to "Server services" these days the server farms usually have to do a P2V of the clients physical hardware in order to replicate the existing hardware and prove that it does the same job as the clients existing hardware before taking over the service.
The vmware converter can be a bit "iffy" - I find the acronis software much much better but you do need to get the extra "Universal Restore" add on.
Note on Licensing.
Licensing is a different topic completely -- however MS will allow you to move your Windows XP installation to another machine (A virtual Machine can be considered as a different physical machine as it has different "hardware") provided the XP system is a fully licensed retail / corporate XP system and not an OEM or "pre-installed one without an MS install disk).
Added - for the unwary.
The main problem with using the vmware converter to do a P2V conversion is that it requires the VSS (Volume Shadow Service) function to be available. So you need to enable the services for that (it's explained in the vmware documentation).
However what they DON'T tell you is that the volume needs to be copied and as this is done first with VSS on the "C" drive itself before the target Virtual volume is created in the directory you have specified you will (like me) probably not have enough space on your C drive to do this -- I always keep the OS in its own (small) partition and have all my data etc on other partitions / disks. The Vmware converter will then fail with a message - unable to copy / create vss volume.
That's another reason for using the Acronis Universal Restore feature.
Cheers
jimbo
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