You will shrink the current partition - C: is what I presume. This will give you a new, empty, 5 GB partition. XP will still be on C: just with less space.
Once you format the other partition XP will still work but it may be unsure what format the other partition is. XP won't assign it a drive letter if it's not FAT, FAT32, NTFS, or CDFS (any of its known formats).
The Microsoft documentation says you can't resize the boot partition. This only applies to their own disk tools, Disk Manager in this case. Resize away with Partition Magic.
I highly recommend you perform some sort of backup - at least of your documents. If this doesn't appeal to you, buy a second hard drive and use a removable drive bay. No fear of losing your data that way.
You could also try VMWare or similar virtual machine product but the second hard disk is cheaper and foolproof.
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