Should be able to upgrade without any problems but is usually better to do a clean install although this will lose all your emails / desktop settings etc. Can't remember if me has a file and settings transfer or not?
You can not normally upgrade using OEM full version (which is what you got). But, you can fool the software to let it thinks it is a new PC/HDD. Basically, just reformat the harddisk using fdisk. But, PLEASE BACKUP everyting before you do this!!!!!!!
Where did the XP disc come from? If it was not supplied with the PC you intend to install it on then you cannot legally use it. The wording on the disc says this much. I would send it back to where it came from and ask for a retail upgrade version.
WinXP CD is bootable, just get into bios when machine (pree Del or F3) and make the CD as the first boot device. If your motherboard does not support cd boot (unlikely because your machine is not old), you need to boot up using bootdisks which you can download program from ms and generate them, you can find link click here