Is there a way to remove the Program Files and Documents and Settings folders when overwriting the current install with a newer one? I don't want to reformat, though it may come down to that. Any help would be appreciated.

Program Files normally holds the file for the programs on the system so you cant remove them unless your reinstalling the application. (you can but itll mean youll have problems with the program in question)

Documents and settings can be copied over, really depends on why you want to do this e.g. you can copy the Documents and Settings file for the admin to your user (if its an admin user). In order to keep your current users settings (such as startup folder) you need to save this file first then copy it over to the new account.

The best practise is to make a clean installation of XP to avoid any later software conflicts...