The read-only attribute being unchecked may be a feature of XP. Try copying a random file from any other CD and check its attributes.
The patch is an executable file and should just have to be run to automatically update everything (without further intervention). If you did not modify the registry file to point to the directory you installed Divinity in, maybe that caused the interruption in ME?
DD was developed under DX 8; some people have had problem using v9, others have not. IIRC, DX 9 was released a couple months after XP, so I think XP ships with v8.
