Advice for changing Windows OS on dual-boot laptop

This is a long post, as I'm asking for advice on several different scenarios. I apologize for the length, but I've tried to make it as organized as possible.
(I posted in Linux forum because I thought this was more relevant to Linux users than Windows users. Apologies if this is in the wrong forum.)

I have Windows Vista and Linux Mint on my laptop. The HDD is partitioned as follows:

DellUtility: 40MB
Recovery: 15GB
Vista: 275GB
File Storage: 100GB
Swap: 4GB
Linux: 70GB

Relevant info: I have Grub installed to the Linux partition instead of to the MBR, and I use a Windows program (I can't remember the name at the moment, if needed I'll look it up) to choose which partition to boot at startup. When the laptop starts, I choose Linux Mint in the Windows program to boot the Linux partition and Grub.

I would like to give my Linux and file storage partitions more space on the disk since I no longer use Vista (although I want to keep some form of Windows on the laptop). However, I can't shrink the Vista partition further due to the MBR in the middle of the disk. I have a spare copy of Windows XP (but no Vista disc), so the only two options I can see to keep Windows and free up disk space is to delete the Vista partition and run XP in a virtual machine or replace Vista with XP.

My initial plan was to install XP in a virtual machine (which I've already done), make sure it worked, and then delete Vista, but I realized too late that doing so might have been a bad idea. Not only did I decide I wanted a Windows partition, not just a VM, I'm not sure if the XP activation code will work a second time.

What I would like to do is replace Vista with XP. I can see two ways of doing this, but I can also see potential problems with both methods.

Method 1:
make backups
delete the Vista partition (possible problems: might screw up Grub, leftover DellUtility and Recovery partitions)
extend the file storage and Linux partitions to desired size
install XP in free space (possible problem: activation code used in VM might not activate XP)
install program to choose OS to boot
restore Grub if necessary

Method 2:
make backups
delete Vista partion (possible problems: same as before)
clone XP VM to free space (possible problems: hardware configured for VM, not laptop hardware)
install program to choose OS to boot
extend file storage and Linux partitions
restore Grub if necessary

I consider deleting Vista a major change to my computer, so I want to clear up some doubts before I attempt any of this.

1. I'm not sure if I should be worried about screwing up Grub since it's installed to the Linux partition.

2. I'm not sure what to do with the DellUtility and Recovery partitions if I remove Vista.

3. The XP activation code is from an old computer with a dead HDD. I used the activation code in the VM and it worked just fine (I would delete the VM after installing XP to a partition so as to only have one copy installed), but I don't know if the code will work a second time to allow me to install to the partition.

4. I'm not very familiar with how virtual machines work, so I don't know if cloning the VM drive to a partition would work or what problems it may cause.

Help would be much appreciated.

EDIT: Instead of XP, I'll be installing Windows Server 2008 (thanks to Dreamspark), so the activation code/cloning is no longer an issue.