Yes you can do that. There is an upgrade disc that just upgrades the current operating system files and i do not think you will lose anything. Not only that but the upgrade disc is half the price of a full operating system. The downfall to this is that if you need to reinstall windows, you may need to install "ME" first and then upgrade again. Most important thing to check is to see if you have enough room on your hard drive for XP.
Peanut - for an upgrade installation of XP, you don't have to install a previous version of windows first. You can do a clean installation by booting from the Upgrade XP CD and formatting the computer. Then, the installation will ask for the previous version of Windows, just for authentication, then continue with XP. I have the upgrade version and always use my old Win 95 disc.