The question is probably more of a moral issue then a legal one since the odds are slim someone is going to be pounding on your door to arrest you.  If you intend on using the same licensed Windows ME version on the 4100 and the XPS R then you have a problem with the copyright.  If you intend on deleting all traces of the Windows ME on the 4100 and will be giving the original disks to the new XPS R owner then there shouldn't be a problem.  Possibly someone who has read all the fine print of the software license may disagree with me, but that is the way I see it.

Personally I would keep Windows 98 on the XPS R.  In opinion it is more stable OS especially on an older machine like the XPS R.  In fact Microsoft at one time had thought so highly of ME that they wanted to drop support of it before Win 98.  Prior to giving the machine away I would security delete the hard drive and do a fresh install of the OS for the new owner.

Thanks. I may just give it away as is and let my family member deal with it. I like ME very much and it was an uptick from 98.
98 seemd to crash a bit more than ME and I do not like XP at all.
Again,thanks.