Yes. If you insert your Windows XP CD while Windows 98 is running, it will ask you if you'd like to upgrade. It will then copy some basic files to the hard drive and restart.
That depends on what exactly you mean by that. You want to run Windows XP within Windows 7 you need to install Microsoft virtual machine. It's free. You want to replace Seven with XP, then you will...
It depends on the hardware. If the PC itself dates from the time when ME was released, then probably not. If it is a modern PC with ME on it, then probably yes. All in all, my feelings are 'No'.