An upgrade installation over your previous setup should preserve your files
and data though they may be moved to different locations as XP has different
locations for some of your information than in Windows 9x. However, do not
attempt such an installation unless you are well backed up.
There are no guarantees that something won't go wrong and if it does, it
could cost you your previous setup and lose you all your files.
Is there a major different to justify moving to XP. It depends on your
needs and how old your system might be. It depends on the applications you
generally use as well as the hardware you intend to use. If your system is
around 3 years old, I wouldn't advise this change without buying a new
computer.
If you have DOS programs or DOS based games to which you are wedded, this is
not a good move.
All that said, if you are inclined to make such a move, there are some
things you should do as far as preparation is concerned:
Check to see if your hardware and software is compatible with XP so you can
fix problem areas before moving to XP. The first step is to use the XP
Upgrade Advisor:
http://www.microsoft.com/windowsxp/pro/howtobuy/upgrading/advisor.asp
Be sure to bring your applications up to date for XP and all your drivers
before moving to XP. It also would be best to uninstall any firewall and
antivirus software before upgrading as either application can interfere with
installation. If you CD burning software, it's advisable to remove that as
well and be sure you have versions compatible with XP for installation on XP
as most earlier versions of such software needed upgrading for XP, the same
for firewalls and antivirus software.