First, even for the upgrade version of XP, you do NOT need to load Me before installing XP.
Next, your system is very close to the minimum requirements for XP.
I would at a minimum add as much RAM as possible.
What I suspect is going on, is that you have some hardware that is not compatible with XP.
Perhaps your video card or monitor.
Some modems and sound cards will NOT function under XP.
What I suggest you do at this point, is get Me running again, and go on-line.
Go to http://www.pcpitstop.com/
and run their XP Readiness Test.
This will identify any hardware issues for your PC that may prevent you from installing XP.
Just last weekend, I worked on a system that should have had no problems with XP. I could NOT get XP to load for me at all!!!
I suspect now, that the motherboard has a problem with either the memory or IDE controller.
The strange thing is that W98 functions fine.
My point, even if your hardware is capable of running XP, you could have a hidden system problem that prevents XP from properly communicating with the hardware.
Even though Me was running fine.
Realistically, I ALWAYS double Microsoft's minimum system requirements.
On a 266MHz system, Windows 98 is likely the newest version of Windows that I would install.
I suspect if you ran some benchmark tests on the system that you would find that:
W95 runs the fastest.
W98 runs 8 to 10% slower than 95.
Me runs at least 15% slower than W98.
Chas