If I was you I format the whole HD just because I think Windows Me is the worst OS that I ever had and, if you do a clean installation you don't have to worry about any conflicts with Windows Me. Get an upgrade of windows XP home or Pro. I think with the machine that you are running now sounds like it will be compatible with XP, but you can always check if your PC is XP compatible by going to the Microsoft web site.
You do not need a full copy of XP because in the installation process it will ask you to put the serial # from any OS that you owned and you said that you have the license of Window Me. That's all you need.
Good luck.
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