XP is a much better OS than ME. XP does not have a system resource problem for one thing and as long as your system has enough RAM, XP will outperform ME everytime.
This sounds like an XP Upgrade CD. Does it have SP2?
I used to have ME on this computer, which was originally made for Windows 2000 and all the time it only had 256Mb of RAM. As soon as I fitted another 256Mb the overall performance and ability of the computer increased.
The mainboard will take 3 x 512 Mb RAM modules but 3 x 256Mb is sufficient for my needs.
When changing from ME to XP I re-partitioned, using the maximum four partitions, and fully reformatted the drive to NTFS.
Upgrading to XP by adding XP is not a good way to go. Better to do a clean install IF your Recovery Media can be used as proof of previous Windows operating system ownership.
I only have a 1·0GHz PIII and use an 80Gb HDD. How do your system specifications compare?
Windows XP will not run your System Recovery CDs. You will probably have to boot directly to the first one in the set.
Do you have a handbook which tells you what to do? If not tell us the Make and Model of your computer so that we can help you better.