Yes it works this way much, software works this way. Basically you start the install using the XP upgrade CD and at one point it will scan your system and say something like no full versions of windows was found please insert a full retail version of Windows in the CD-ROM drive now so that we can validate the upgrade.
You can insert any full windows CD if I recall (Win95, win98,win2000, winNT, winME) actually I dont think ME or NT will work, but the others will.