Dennis:
First some some discussion of which is the best approach you should take and then some instruction on how to accomplish it.
It is my belief to have both the capacity to run Windows in Bootcamp and also access it with Parallels. This approach gives you the best of both worlds:
In Bootcamp, Windows operates more efficiently. For example when I previously used to digitize HD H.264 content from my satellite HDTV using a hardware device run by a Windows driver, this driver worked with USB on a more stable basis in Bootcamp and did not function in Parallels (this example became moot when a software engineer released for sale a Mac driver for this hardware).
In Parallels, there is some loss of efficiency due to the fact that Windows is being run in "virtualization" but with the additional capability of running applications in Mac OS X concurrently with Windows and not the "dual-boot" requirement of Bootcamp. Your experience of being "locked in" may not appreciate nor need this concurrent capablity.
An addiitonal feature of Parallels is that it can access the Bootcamp partition for its virtualization file, so there is no duplication of the many GBs of hard disk space that is required by Windows. It is only installed once (but, required to be "activated" by Microsoft twice, which does not represent any practical problems).
Hence you can use Bootcamp or Parallels as desired, with little or no disadvantages to having the capability to do both!
That leaves the Windows XP issue: Bootcamp will only install into Bootcamp in Snow Leopard (and in Leopard, which is not relevant to our discussion).
So, after you have completed the clone, you should:
1. Call Apple and give them the model and serial number of your iMac and they will provide you a Snow Leopard 10.6.7 Restore Disc for that model (about $17.95).
Your retail version of Snow Leopard is either 10.6 or more probably 10.6.3 and it will NOT boot that machine nor can it be installed into it, a partion or an external drive to boot that machine.
Owning the proper Restore Snow Leopard DVD will give you resale value, as that iMac is sought after by those in the after-market who want to be able to boot into Snow Leopard.
2. I, like you, use Windows XP and have no interest in any Windows upgrade. Macs that can boot into Snow Leopard (or earlier) can install Bootcamp that supports Windows XP. In my experience, I was able to upgrade to Lion on my 2009 MacBook Pro and I can still boot into Bootcamp to use my WIndows XP. I have not upgraded to Mountail Lion, but my guess is that I will still have that capability when/if I do.
However you want to avoid all the work necessary to restore Snow Leopard on your iMac, just to install WIndows XP into Bootcamp, just so you can upgrade to Mt. Lion and restore your current files. The way to do that is to follow the instructions in this thread (and then stop once Windows XP is installed):
User Tip: BootCamp - Install Windows XP & then Windows 7
Afterwards you should have a Bootcamp that will run WIndows XP.
Parallels 8 is now available at a 40% discount with the March 2013 Macupdate bundle of 10 apps which I just ordered; I have been using Parallels 7 all of this time.
You can also download a 14 day free trial of Parallels 8
I am sure you will have more questions...