In order to qualify for the license of an upgrade version you need to have a licensed qualifying product. The product doesnt necessarily need to be installed.
If you do an upgrade over a qualifying product the installation recognises the product and installs straight off.
If you start the installation from within a qualifying product but choose to set up a dual boot by installing to different partition, the installation will also recognise the qualifying product.
If you clean install(either as a dual boot or as a sole operating system) by booting off the XP cd at a point early in the process, you will be asked to demonstrate possession of a qualifying product, usually by inserting the cd for the product in the CD drive.
Now some people dont have CDs with the qualifying product on. They have recovery discs or similar. There are work arounds for these situations, if you need info on this please post again with details of what you are trying to do.
As i only have a recovery disk for win98 SE with my HP system what would be the work around? I haven't been able to reformat my HDD because my recovery CD doesn't seem to work. I posted here about it and was told that that it might be to do with the tatoo on the origianl HDD. So i'd be looking to install clean XP and not Win98 SE.