Like past versions of Windows, Vista is available is a full version or an upgrade, with the upgrade being 30-50% less. However unlike previous upgrades, the Vista upgrade process requires XP to be installed on the system before it can be upgraded. Prior upgrades only required a physical disk from an older OS as evidence of the previous purchase.
Brian Livingston (author of the “Windows Secrets” series of books) has documented the procedure to perform a clean install with an upgrade license key. This is not intended to circumvent any licensing, but as we all know, Windows usually performs better if you start over with a clean install. The steps are documented at http://windowssecrets.com/comp/070201#story1. This upgrade scenario is also addressed by KB930985 here.