The answer to question number one is no, you couldn't just go the updates and get all of them. You would be stopped at getting XP service pack one. That is one of the most important downloads so go here and follow these instructions once you have installed XP while not connected to the internet:
http://www.tweaktown.com/document.php?d ... 50&dPage=1
Now, after doing this which is actually very simple, you can get all of the updates available.
The answer to the second question is yes Fluffy. As usual, I'd say that you need to back that up somehow but if you use XP to upgrade your OS to XP, that info should be safe. I don't like upgrading anything. I think I'd find a way to back up what you need and format your disk with Windows 98 boot disk and then boot the pc with XP in the CD and the CD set as the 2nd boot device after a floppy. Just my opinion. XP can use Fat32 but works better with NTFS and is more secure and capable with NTFS too.