Earlier quoted context omitted.
Didn't everyone do it that way? I tried the upgrade-option exactly once. I can't remember whether it preserved my background color. But I do remember that all sorts of drivers got screwed, software installs would fail with obscure error messages, and it generally was nothing but problems until I finally wiped and re-installed.
I upgraded from NT4 -> 2000 -> XP without any major issues. AFAICT it was mostly just a file replacement process. The DOSWin to NT upgrade path always seemed pretty flaky though. The demonstration cheated a bit by using a vanilla VMWare config; an actual PC would be loaded with crappy vendor drivers and startup software which complicated any upgrade.
The idea of a well-used registry from Win95 being still used in a 2000 or XP machine makes me shiver in horror.