Yes, the install XP part will erase the new drive.
The correct sequence is :
1, Remove old drive - put safely away
2, Insert new drive and install windows
3, Put old drive in as 2nd drive (check jumpers if it's an IDE ) and configure bios
4, Start windows and copy data from drive D: (or E:) to your new drive C:
5, Remove old drive or keep it as a backup
You could skip 1, and leave the old drive in place as the second drive while you do this - but it does invite a visit from Mr Oops!