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You don't have to do a full install, but it is usually recommended. When you pop in the CD and start the install process, it will ask you if you would like to do a full install or an upgrade. The upgrade will do just that, upgrade your system while saving all the current data. The full install will take you through the precess of formatting the hard drive (erasing EVERYTHING) and then installing a fresh copy of WinXP. Either way, I would, like projkt4 said, format the drive into NTFS. WinXP allows for either, but NTFS has been proven to be more efficient, stable, and allows for enhanced file management features.
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