With a PC you are much better off going full out & reformatting your system drive, then doing a fresh install of XP.
If you aren't in the habit of this, then it is indeed highly recommended to do a second install on a different physical drive & get it totally up and running before you wipe the old one - as mentioned by others here.
Once you have the OS installed, but before you install any other software, you may want to setup some sort of "system restore" with one of the various programs out there. I'd avoid using the Windows System Restore. I actually totally disable this service along with other things that can bog down the computer. Norton Ghost is a very popular option, & there's that True Image thing that lowland mentioned.
I'd make an image of the system right after the OS is installed, and you may want to make more along the way depending on what your setup is.
I have never actually tried any disc image type stuff myself, opting instead to start fresh each time. I'm kinda picky / obsessive like that. Probably needlessly so! ha.
On my system, audio is on separate drives (of course), and I also put my various documents on yet another drive as well. That way the only thing on the system drive is the OS & the programs I use.
On my documents drive I have a folder I call "system backup" where I have the installers for all of my programs. This way, I can wipe the system drive & be confident that there's NOTHING on it that I will miss once it's gone...With one exception: email & web browser bookmarks. Gotta remember to take that stuff with you! ha ha.
So anyway, my process is:
1) format the drive
2) reinstall windows
3) tweak windows so it isn't chewing valuable system resources
4) install everything in my "system backup" folder
And voila! Two hours later I have a fresh & happy PC.
Re: step 3: there are many things that Windows likes to do by default that can actually slow down your computer. It also likes to connect to the internet all by itself for updates 'n' whatnot if you let it. I'm sure you're aware of this. There are a bunch of tweaks you can do to get things running more smoothly. I can elaborate a bit more if you want. There are also many websites out there that have lists of tweaks you can do.
I really should try the whole image thing sometime...I always think of it when I'm doing a re-install, then after I'm done I end up procrastinating it until the next time...and so the cycle continues...
-craig