You can do that but it will involve lots of (not-so-easy) work and time. It'll be atleast 3 times better to just format the drives and do a clean install. Also, if you move your OS installation to a different partition, there will always be some incorrect file locations and errors.
Please format your C and E partitions and do a fresh windows xp install on C to avoid any problems.
Yep, moving around the os folder is not a good idea, though it might be possible coz there's always some file/app/variable with a wrong path in it, like a disaster waiting to happen.
Just a matter of discussion, If I do the following
1.Format Dive C.
2.Relocate all files and folders from E to C with software like 'application mover' which is suppose to relocate everything including configeration and registry.
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