So, you've paid for two Vista software licenses, right?
A possible flaw. Installing Vista on more than one computer will definately, more than overall, cause it to freak out, and dissable itself in 60 days.
There should be absolutely no need to uninstall Windows XP.
Like Dilbert said, just put the disk in.
The format option you are looking for goes as follows:
You will be brought to a menu.
It will shows all your hard drive partitions.
Find the partition that has your XP instalation on it, and press "D"
then you will get a warning
press "L"
Select the unpartitioned space, and press ENTER
The rest is very self explanitory.
Also see:
http://www.windowsvista.windowsreinstall.com/