I completely hated Windows ME. When it came out, I tried it for like 1 week and then formatted my computer. I just held on to W98 until Windows XP came out, which is by far the best windows OS to date (at least for home users).
My mother runs Windows XP on a Pentium3 500Mhz with 224MB RAM, and it's very fast. Heck, it's faster than my sisters' computer that runs on an Athlon 900Mhz and 384MB RAM.
So my advice would be to stay with 256MB RAM and install Windows XP. You'll be able to do most desktop things with that setup.
EDIT: I used to "D" word. Corrected.