I wonder why it is that it wants to find XP (or Vista) on the drive. If XP was activated on that machine, then it seems that MS should have all your hardware IDs in an XP activation database. Find those IDs and see if XP was ever activated on that machine, instead of making users do this idiotic double install.
Any theories why it might work this way? I doubt it's simple antagonism toward users, but it sure looks like laziness or incompetence, or leverage to sell licenses other than the cheaper upgrade license.
I wonder if SW runs on Cedega.