If you wish to do a straight upgrade install, boot to the Windows ME
desktop, place the XP CD in the drive, when the setup screen appears, before
running setup, be sure to first select "Check System Compatibility" as it
will run a check on hardware and software currently installed.  If it finds
any issues, you should take care of them first as any such issue might stop
the installation process.

Once you've done that, again, place the XP CD in the drive while at the
Windows ME desktop, select setup windows and when it asks you to specify
what type of installation, choose Upgrade.

If on the other hand, you wish to do a clean install, one which wipes your
drive, deleting Windows ME and all other data and information on your drive,
choose "New Installation," and follow the instructions below:

Once the system reboots and starts the rest of setup:
After loading drivers and files, you should be taken to a screen with
the following:

To Setup Windows XP now, press ENTER.
To Repair a Windows XP Installation using Recovery Console press R.
To Quit setup without installing Windows XP, press F3.

In your case, press ENTER.

Agree to the License agreement by pressing F8.

You will then be taken to a screen with two options.

To repair the selected Windows XP installation press R.
To continue installing a fresh copy of Windows XP without repairing,
press ESC.

This will bring you to a partition map where you
can delete, create and format partitions.
Select the drive you wish to format, delete the partition, then create a new
partition, format as desired and continue with XP installation.