In the Windows 7 install process, if it's an upgrade, you're gonna be prompted "Put in the disc of your previous Windows version" or something like that, and it's gonna make sure it's a full version of XP or Vista, then it's gonna ask you to be back in Windows 7 and it's gonna install.
So this means different things for the two of you.
For hydro, sounds like you don't have the XP disc because it came preinstalled, and for you I'm pretty sure you'll need to get a disc. Not sure what the solution is for this, if MSFT has some sort of process for it, maybe they can authorize you online like they did with some Vista people. Perhaps your computer manufacturer is responsible for it (they might be able to sell you an OEM XP disc). Not sure. Personally, if I were you, I'd just download an XP .iso and burn it.
HowStern, you'd have no problems upgrading to Windows 7 with that (an OEM disc), but I'd suggest passing on it and getting the $50 upgrade, just use some other OS in the interim (Windows 7 RC or Linux if you want free, or some other Windows you have hanging around)... saving $60 for just an hour or two's worth of trouble (that is, reinstalling an OS in a couple months) is worth it, imo.