Agreed on the upgrade part, a re-install is much better. If you must upgrade, XP will only replace the "Windows" folder and some stuff like Documents. Basicaly, any folders that is a part of Windows will be replaced. You will probably need to re-install any programs you have on there anyway, because certain system files for a program are placed in the windows folder during install. Good luck!
I upgraded XP from ME. XP ran fine for about two weeks, then system files got screwed up for some odd reason, and I had to reformat. Luckily before the upgrade I backed up everything. I reinstalled XP on a clean blank HD and it has run fine for going on a month with no kwerks or errors.
I have worked as a system administrator for two years plus, and I never upgrade client machines-I tell the user to backup, then I wipe 'em clean and put the OS on it fresh.