Can I delete Boot Camp?

I am using an Intel 2.66 GHz iMAC, 4 GB of SDRAM , with Leopard 10.5.8. I am using Parallels 4, build 4.0.3844, which I upgraded from Parallels 3 originally installed.

I first installed Windows XP, Home Edition, SP2 in Boot Camp prior to getting Parallels. I moved over many (20+ years) files from my old Windows machine into the Boot Camp partition. When I installed Parallels 3, I installed it using the Boot Camp partition (I believe), and it is called My Boot Camp when I start it in Parallels. That seemed to work reasonably well, but I found the file folders on both Home on .psf (Y) drive, and on the C drive. Sometimes I found myself putting new files on one drive or the other, and was getting quite confused, but it worked, and I could find my files, although sometimes with effort.

Recently I bought a new MacBook Pro, and immediately installed a fresh Parallels 4. Instead of using Boot Camp at all, I created a VM, I believe called Windows XP, and it worked well.

I decided that I would like to eliminate the Boot Camp confusion, so I just created a VM on my iMAC and reloaded my XP and most of my important Windows software - Wordperfect 12, Office 2007, and Quicken 2009. It runs smoothly, and magically the Home on .pst (Y) drive appeared with my files. It named the VM Windows XP.

I would like to now eliminate the Boot Camp completely, but worry that if I delete the Boot Camp partition the Home on .pst (Y) drive will disappear, along with my files.

My questions:

1. Can I safely eliminate the Boot Camp partition?

2. Will the Windows files on the new Windows XP VM be backed up by Time Machine?