|OK, 2 things,|
First, you MUST have more RAM. Most of the time XP will not finish the setup if you don't have 64MB. Since 2 is going to video, this would keep it from installing, but it will usually stop the installation and go to the blue "DOS" (I use that term loosely :) ) text screen and tell you that you need 64MB. However, this does not sound like it is your only problem. Get AT LEAST 128MB, 256 would be better. (BTW the PNY 256MB PC100 laptop RAM is 16 chip and will probably work)
Second, Since your HD is big enough, you should try copying the CD to the HD and doing the whole thing from the IO. Now, I THINK you only need the i386 directory, but I haven't tested this yet. So, the safest thing would be to copy the entire CD to a folder on the HD. (Make sure the drive is sys'ed first. All you need is a command prompt) then run winnt.exe from the i386 folder. It will give you a message that you should use smartdrive to install faster, but I've never noticed much of a difference either way.
The only drawback is that there will be a boot menu when win XP loads. It will see the 98 DOS system files and treat it like another OS. But you can change the wait time on the boot menu to like 5 seconds so it's not that bad.
I hope this makes sense, I tend to ramble on about XP.