das raises a good point- your hardware is probably not sufficient for newer versions of the OS. I have upgraded Win98 machines to WinXP, and added some ram to get them to work properly. IIRC you could run Win98 with as little as 128mb or 256mb of ram, but WinXP required a minimum of 512mb. Depending on what you want to do with the machine you might need more memory than that, and of course your cpu might be pretty slow too. You might be able to hunt around and find an XP upgrade disk. I'm not certain what the minimums are for Win7, probably 1GB of ram at the bare minimum. At this stage I wouldn't try to upgrade to Vista, just go straight to Win7. But then if you are doing that you probably should just start over with a new PC.
Now if you find out that your machine has enough ram to run a newer version of the OS, if you buy a WinXP upgrade disk then you can either upgrade your machine or you can do a clean install. If you do an upgrade then you get to keep your installed apps. I'm pretty sure if you tried to upgrade to Vista you would need to do a clean install and definitely if you upgrade to Win7 you will need a clean install, so be sure your data is backed up first and then you get to reinstall all of your programs.