The booklet (Express Upgrade to Windows Vista) that accomanied your package explains everything in great detail.

 

As far as restoring your system to the factory state, make sure you back up any data files that you want to keep first. Restoring would certainly give you a much cleaner system on which to perform the upgrade.

 

Personally, I prefer the Clean Install route, but if you do this, you will not be able to use the Upgrade Assistant DVD that came with your package. You will have to instead manually download and install all of the Vista drivers for your particular system.

Dell's instructions (which appear to be a little incomplete) are HERE

<ADMIN NOTE: Broken link has been removed from this post by Dell>

There is a link for a clean install as well.  if you are going to go back to your original state, there may be updates you need first, but there should not be many as your system is new.

 

What they don't say is to run the other CD first...it should be the one that contains Dell's tool to check your system and show you any updates that you should do before running the upgrade.  Be aware that it will not catch each and every item that requires an upgrade, but will get the most important ones (such as if you require a BIOS update).

 

Expect there to be some compatibility issues with a few of your existing programs...see if the manufacturer has an update/patch for Vista, check the forums for solutions, and if all else fails, try running the program in Compatibility Mode for Windows XP Service Pack 2.