You can upgrade ME to XP or you can do a duel boot install. It will run in either a fat32,fat or NTFS file system, you choose. I did a duel boot which just involves telling the installer that you want to do a full install and that you want to choose what partition you want it installed on.
EDIT: Just noticed that you were already duel booting. Not sure what upgrading your ME to XP will do to the boot.ini.