choose upgrade when installing from xp. it'll keep your settings and files in tact.
when installing from the cd (booting from cd) you'll have to let windows remove the current installation (eg the /windows folder). It also messes with /Documents and Settings folder putting .WINDOWS behind the standard folders-names if they allready exist. Pluss you'll have to reinstall all appz
You current install has /docs and settings/all users. if u install without formatting you 'll get /doscs and settings/all users from your 'old' install and docs and settings/all users.WINDOWS from your new. I think that the folders in docs and settings are protected, eg you cen't just remove them, even if unused. Not sure bout that though.