Hi

Well first of all 128MB RAM just is not enough for XP even if MS says it is.
I would say that it runs (but not at its best) on 256MB.

It isn't a good idea to install the older OS first and then upgrade XP over it. There are always problems. If you boot up with a WinXP Upgrade CD and run Setup, it will eventually ask to see your ME CD to make sure that you are entitled to use the Upgrade version, but will otherwise do a clean installation of WinXP just the same as the Full version.
You will be able to partition and format the drive during the install.
The instructions are all in the excellent tutorial below.

Clean Install XP
http://www.theeldergeek.com/xp_pro_i..._-_graphic.htm

This is all assuming you can get the CD ROM recognised.
Have you plugged it in and then checked in the BIOS to see if it is recognised and set before the hard drive in the boot order?

So run the Upgrade Advisor Tool
If you have an OS working check if the system is suitable for upgrading to XP
The Upgrade Advisor is a tool that checks your system hardware and software to see if it is ready for upgrade to Windows XP. If you run Upgrade Advisor while you are connected to the Internet, and if your system needs updates that are available on the Windows Update Web site, Upgrade Advisor will find and install the updates for you.

http://www.microsoft.com/windowsxp/p...g/advisor.mspx

I would also at least double the RAM

Elaine