512Meg RAM would be better; even upto 1Gig if pennies in piggy-bank will allow it (and the MoBo support it).Also ensure (first check) that the MoBo etc. will support XP - in terms of drivers various. Most of your current kit will probably be OK - but again wise to check if drivers are available for it - before you go to XP.
Either run the XP readiness util; or maybe check the Gateway site to see if what you have is OK for XP (with a little extra RAM added in)?
If the ME disk you have is not a full version.. then likely you will have go for full version of XP.
I don't think recovery CD's are acceptable compliance check CDs; although if ME was already installed an XP upgrade would then probably accept it (the presence of ME already there)? Possibly others here can advise further on that aspect?
PCClub.com do a good price on both Home and Pro - and also drives...; both on-line and the local store (if there a branch in your area). And if you can stretch a little to a 100-120Gig drive then do so...?
Also when you configure the drive, partition it to have both Primary and Extended partitions. Primary for OS/apps/utils etc; Extended for data - only. And - although many here will disagree - I suggest you retain/format fat32 for data at least; allows more recovery of data options if the OS goes pear-shaped at some stage. If it's ntfs your options are slightly less flexible... but it can still be recovered even then.
Personally for most domestic environs I still prefer fat32 overall for both Primary and Extended areas. Although if heavily into video-files, mega-music files etc. ntfs may then be a better choice - with the caveat re' access in event of a crash of OS in mind nonethless...