Sounds like you have adequate hardware. The problem I have with it is the Windows ME. I use a number of different OS's frequently, from Linux to XP, win 2k and 2k3; I'm not knocking Windows. But ME has quickly been tossed. There are a myriad of yada, yada technical explanations why, if you want to hear them; PM me. Trust me all you really need to know is; “Please for the love of all that's good and wholesome, please get XP, or learn Linux." Although, the latter of the two may not be practical for you.
Another major cause of lag on Multi player games is your connection. This opens up a whole new line of troubleshooting.
1) Do you have a fast enough connection? (dial-up, ISDN, DSL 128k, DSL 256k, Cable {docsis}, bla, bla, bla)
2) What is the condition of your connection?
This is where it gets tricky for the casual computer user.
Start with the Physical layer of the OSI model.
Check connection for obvious things like damage or dirt, or a cable just not properly plugged in.
Check the cables themselves. If you can, have them tested. It is often easy and fairly reliable to just swap the cable out with an identical one. The chances of two bad cables is not likely.
If you decide that your CPE cabling (Customer Premise Equipment cabling) is in good shape. then you may want to call your service provider for your physical connection, for a test of the circuit. This step goes back to question 1, "What type of connection".
2b) This only applies if you have DSL/Cable or some other form of broadband. If you have a router or firewall between your PC(s) and your Broadband modem, disconnect the router/firewall and connect your PC directly to the modem. Sometimes (Seen it a lot with linksys) the firmware becomes corrupt and it starts dropping a lot of packets.
2c) If you have broadband cable service, Make sure you have a very short run of cable coming off the splitter going to the cable modem. Best case scenario is to have the splitter where the cable enters the house. Have your cable modem somewhere near it away from breaker panels or any high voltage stuff. Run a short coax like 3-6 ft to the modem, and then go the rest of the run using Cat 5E. That's the one with the RJ-45 connectors, that look like big phone connectors.
If none of this works, then you may consider reloading your OS. I would do that anyway with a current one.
It could very well be that your drive is just full of junk like excess and old files, adware, and spyware. Try downloading and installing
Ad Aware Here . Upgrade it before you use it and then run it.
Good luck.