You are right, Vista Upgrade will not install from the boot option. I tried installing from the boot option to a new partition without XP installed and was denied access and told to run the DVD from the OS. I then tried to run from the boot option with Win XP installed and was told the same to Install Vista from XP. So, you must run Vista Install from the existing OS.  No CD XP disk verification will work either, it has to be on the hard drive. 

 

However, built into the installer is an option to allow you to do a clean install, or nearly clean install, using the existing OS partition.  As one of the options, Vista will collect ALL of the software on the drive and move it into a Folder named Windows.old, which you can delete after install if you want.  By the way, you will not be able to open or recover files from the Windows.old folder once it is created.

 

If you are concerned about the viability of the partition as I was and wanted to make sure there were no bad sectors, after install, I did a complete Checksum Scan with all recovery options enabled. A good thing as I found five bad files which were recovered along with one bad sector.
Before you try the following I would make a partition backup incase I got it wrong!!!

You can install Vista into another clean partition, creating a multi-boot configuration.  Later you could reclaim the XP partition with repartitioning software. 

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