Yes that is correct, booting the computer off the CD will wipe the Windows 7 installation and install XP fresh.
Most likely the third disc would be third-party applications, such as Dell's recommendations (i.e. what they get paid to install on your new computer) on "useful" programs you may not ever need... If this is the case I recommend not to install that disc!
But kudos to Dell for transferring warranty and sending out discs...
Yes, I agree that it is great of DELL to do this. I will take your recommendation and install just the XP and the drivers. The guy also had me run a diagnostics test on the computer to try to find out why it shuts down and restarts whenever it wants, but there were no problems. He said that he thought installing XP PRO back on may cause it to quit doing this...does this make sense?