Turn your Xserve into two machines

Brave indeed.
I would get a separate linux box and run the two Windows servers on that using Xen or VMware Server.

I would not rely on Xservers for production. The one (G5) machine and drive array that we used had a higher then acceptable drive failure rate. (As in: higher then the Dell sitting next to it.) At the time Apple used drives that were designed for desktop use not server use.

Another reason this is a bad idea is that Mac OS X is fairly bloated when it comes to serving Virtual Machines. The host operating system should be as lean as possible. If you are running other services on the host server, and something crashes, it has the potential to bring every Virtual Machine down with it.

I run VMWare server in production environments. They are hosted on Linux boxes which have no extraneous services running on them, no Graphical environment, and the only services running are those required to run VMware Server.

In addition, other virtualization products have utilities which make management of your Virtual Machines easy. You can use command line tools and scripts to check the health, suspend, power on Virtual Machines. In my few weeks of using Parallels on my MBP, I haven't come across and command line utilities.

This story definitely falls in to the category of neat, but not something a responsible sys admin would do in production.

You are a braver man than I, Brad.

I have tested, and continue to run in a production setting, two instances of Windows 2003 Server hosted by Parallels Desktop...