Windows XP to windows MCE upgrade question

Its always recommended to back up your data before doing a upgrade. Personally I never do a upgrade I find it best to always do a clean install.

Your best option would be using like nero and back up your data to make a copy of your music library and other important documents and do a reformat.
 
You could also use the windows backup tool, it will do the job fine and its free.
 
Just to be safe, backing up your data is a good idea. iTunes lets you copy your library to CD/DVD without losing the song information and organization.
 
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