If I remember correctly, WinXP Professional (without SP2) will not upgrade a system having WinXP Home with SP2... (at least for me, I had a system with XP Home OEM+SP2 integrated. when i tried to upgrade to XP Professional without SP2 integrated, it said something like cannot upgrade because current OS is newer)
If not, upgrade will allow you to replace the old OS with the new OS without having the hassle of reinstalling software (just like TheRaven said)
In any case, it is advisable to back up your data before doing this... WinXP has a handy file and setting transfer wizard that can come in handy for this occasion...
Also, if you do a fresh install, I think (but not sure) that you can choose not to format the partition, so data should not be lost... In any case, I think it is better not to have data files in C drive as it will affect the performance of your system...
Arun