I'm no expert on RAM requirements for various apps, but it seems low to me. I'm currently running 512, and least I recall running in Win98SE or FE is 384. RAM is so inexpensive it certainly wouldn't hurt to add or replace if necessary if all banks are full.
However, you should still be able to run setup by unlocking C drive with current memory. You might try selecting MSDOS prompt in Windows and try running unlock command there, and then return to Windows by typing "Exit" and press "Enter," and then try running setup from Windows. If you get same error or are unable to run unlock command this way, then disk is still locked. Directions in the first paragraph of my post #6 here should work if this doesn't.
BTW you can find correct RAM for your system from some memory manufacturers such as Crucial at
http://www.crucial.com/ by simply selecting make, model, etc. for your system. Note you don't have to buy their brand, and any brand of same memory type should work.