I created an ISO on my XP desktop PC, copied the ISO of the XP install CD to my MBA using a USB stick. I then mounted the ISO as a DVD drive in Parallels and did the install from there. It worked quite well. I had Parallels create an 8GB Virtual Drive and my XP install with Office is using just over half of it. For what I will need XP for, that will be plenty.
After the XP install, I went into Add/Remove programs, Windows Components and removed all the misc XP stuff... games, Accessories, etc. Also, went into msconfig and turned off many unnecesary services.
Overall, the XP load works pretty well and is actually quite speedy especially on my MBA's SSD drive.
Good Luck!