No you can't directly upgrade to Win8/Win8.1 from Windows XP. You can read more here.
1. Yes, I have pics and documents that I am not sure are backed up so would like to get those off. I also, have Quicken data etc that I'd like to get as the last back up on the USB is 9/10.. I do have Norton Restore on my USB but can't figure out how it is helpful...
This should be doable. It will be much easier if you are able to burn a CD. Would you be able to use a co-workers machine or friend/family member's machine that has a working burner? If so, please follow the steps below to create a bootable CD.
1. Download OTLPEStd.exe to your desktop of a working computer.
2. Ensure that you have a blank CD in the drive and a working burner.
3. Double click OTLPENet.exe and this will then open imgburn to burn the file to CD
If you can't do this just let me know. There are other ways...it will just be more tedious and take longer.
2. By not recovery to previous state, does that mean I will lose my data or is this a way that I might retrieve it before I wipe the operating system? If my data will be mostly available so I can retrieve, then yes I'd like to try
We don't need to go through the recovery steps if you plan on wiping your machine. We can try the previous step to get your data first. The recovery steps are intended to make your machine bootable again but there are risks. If we can't do the previous steps (because you don't have access to a burner or because it simply doesn't work) then we can try the recovery steps.
3. Ultimately, I think I have no choice but to install Windows 8 or retire the computer. I did run the windows 8 Wizard and it said my computer could be upgraded. I'm not sure if all my memory slots are used. When going through he BIOS it looked like there may be 2 slots that I could add to. This is not something I'm terribly familiar with though I've seen it done and it looks simple enough.
It's ultimately your choice to retire the machine or install Windows 8/8.1. If you ran the Windows 8 Upgrade Assistant which it appears you have and it says it can handle it you can definitely try. One of the best tools (in my opinion) to determine your RAM, how many slots, what it can handle, etc. is the Crucial System Scanner. Your machine does meet the minimum requirements for Windows 8/8.1. So if you decide to install Windows 8 you can do so and not worry about the memory right away. You can always add later.
Let me know how you would like to proceed.