As others have said, yes it will work. You won't lose your files, though it's INadvisable to do this without FIRST backing up the important stuff to other media / drives -- preferrably external media and / or other systems.
So, you will keep your data, and you will get to keep many / most (?) of your settings. But you will probably lose your sanity -- if you're even the least bit anal about system configuration and behavior. Upgrade installations of Windows operating systems don't usually produce the best-behaving PCs. This is especially true if you're having any kinds of device / driver problems with the old OS.
- prosaic
BTW, Just in case there might be a misunderstanding going on here. When you attempt to do an upgrade installation of WinXP over a previous version of Windows that's using a FAT32 partition you will wind up with a FAT32 partition. You can CONVERT it after the OS installation, but I don't think it will convert during the installation unless you delete the partition and re-create it as NTFS followed by formatting. In that case you would most assuredly lose your data. If the installation procedure actually allows you to CONVERT the partition from FAT32 to NTFS, then I am wrong about this. I have to admit it's something I just wouldn't use anyway. I believe in starting off with a fresh installation of an OS on a freshly-created and formatted NTFS partition.
If you convert a FAT32 partition that was created by another "FDISK" than the partitioning tool that comes with Windows XP (and all of your FAT32 partitions fall into this category) then using CONVERT to change the partition to NTFS will probably cause you to have 512 byte clusters. That is NOT good for performance.
There are LOTS of reasons you should consider doing clean installations on these PCs.