A trick that works is to position box #2 with position: absolute instead of position: relative. We usually put a position: relative on an outer box (here box #2) when we want an inner box (here box #3) with position: absolute to be positioned relative to the outer box. But remember: for box #3 to be positioned relative to box #2, box #2 just need to be positioned. With this change, we get:
And here is the full code with this change:
<html xmlns="http://www.w3.org/1999/xhtml" xml:lang="en" lang="en">
<head>
<style type="text/css">
/* Positioning */
#box1 { overflow: hidden }
#box2 { position: absolute }
#box3 { position: absolute; top: 10px }
/* Styling */
#box1 { background: #efe; padding: 5px; width: 125px }
#box2 { background: #fee; padding: 2px; width: 100px; height: 100px }
#box3 { background: #eef; padding: 2px; width: 75px; height: 150px }
</style>
</head>
<body>
<br/><br/><br/>
<div id="box1">
<div id="box2">
<div id="box3"/>
</div>
</div>
</body>
</html>