(FORTUNE Magazine) – Microsoft is just a few months away from introducing Windows XP, the newest version of the operating system used by the vast majority of the world's personal computers. The company trumpets XP as its most significant software product since Windows 95. While it's highly unlikely that throngs of people will line up before midnight for the Oct. 25 debut of Windows XP, as they did for Windows 95 six years ago, there are some compelling reasons to consider upgrading to the new system software when it arrives. Of course, there are also compelling reasons to go skydiving or to run with the bulls in Pamplona. Some people will be more compelled than others.

The catch is that to take advantage of the main benefits that Windows XP offers to consumers--including increased reliability, better handling of digital media, some nifty communications features, and a better, cleaner user interface--one needs a PC with at least 128 megabytes of system memory (RAM), at least a 300MHz Pentium-class processor, and at least a couple of vacant gigabytes on the computer's hard drive. Microsoft says that people who bought their PCs after January 2000 can probably upgrade to XP with little or no hassle. But for people with older PCs who can't stand another day with Windows 98 or Windows ME, the question is whether to attempt a hardware upgrade or to bite the bullet and buy a new PC. It's one of the more vexing dilemmas faced by computer users.

Following are some issues to keep in mind when making that decision. First, the argument against upgrading:

Given the current price war that has driven down the price of new, powerful PCs to less than $1,000, and given the cost and hassle factor of upgrading older PCs, many people may decide to wait to move to XP until they buy their next computer. That's the path I'd recommend for most consumers.

Of course, buying a new PC is also the most expensive path. But in reality it's not much more expensive than upgrading an older PC component by component. Newer PCs have lots of improvements that are often overlooked when it comes to upgrades, like faster system buses (internal data pathways), better graphics subsystems, USB and FireWire ports for connecting newer peripherals, faster hard disks, and so on. Unless you're a tinkerer or on a tight budget, it may make more sense to buy a new machine during this price war and pass the older machine on to charity or to another family member.

Keep in mind also that new PCs come with warranties and technical support. And if you get dizzy just thinking about opening the computer case, factor in the cost of taking the PC to the shop for professional installation.

For Internet users, nothing delivers the same performance surge as going to a broadband Internet connection. However, broadband services (DSL, cable modem, satellite) are not cheap, and lately the high-speed service providers have been raising rates to $50 or $60 a month.

On the other hand, there are plenty of good reasons to consider upgrading your old PC.

In terms of getting the biggest return on your upgrade money, start by adding more memory. Even if you're not planning to upgrade to XP, you'll almost certainly notice a performance improvement by moving to 128 MB. If you are enticed by digital media--including photography, video, and music--you'll be happier with 256 MB. Memory prices vary depending on the model of your PC, but figure about $75 per 128 MB of additional RAM.

Don't forget the hard disk. Besides providing more storage space for all those MP3 music files or digital photos, newer hard disks, operating at 7,200 revolutions per minute, can also speed up data access and transfer times (5,400rpm drives are cheaper but not enough to warrant using them). Adding a 40GB drive can cost about $150.

Most new PCs come with a CD-RW drive, which both reads CDs (for installing new software, for example, and for playing audio CDs) and writes CDs ("burning" data onto inexpensive blank disks for making backups, archiving digital photos, or making custom MP3 music disks that can be played in other CD players). Adding one to your older PC typically costs $150 to $250.

You'll notice we haven't said anything about processing power up to this point. Intel is preparing to crack the 2,000-megahertz (two-gigahertz) barrier later this year; just knowing this makes even a one-gigahertz PC seem rather pokey. Upgrading the processor is more complicated than upgrading system memory or hard disks, and as a result it ought not to be undertaken casually. And if there is a wide delta between the speed of your PC and the ones now on the market, say, 500 MHz or more, upgrading the processor simply straps a jet engine onto your same old go-cart.