I would suggest that it would be wise to use this opportunity to go for Windows 7.
You are eligible to install the upgrade version with an XP licence, but it would also have to be a fresh install.
If you wish to persist with XP or wish to install Windows 7 the procedure to save your existing stuff is the same.
You can use the the files and settings transfer wizard in XP to save everything to your USB HD, or in Windows 7, use the Windows easy Transfer utility.
Then do a fresh install and restore the files and settings.
This is the simplest way.
Of course Saabs alternative is good but slightly more involved.