Upgrades from Win98 to Win2000 are possible but not recommended.
The two OSs are radically different, and if you upgrade from one to the
other then you end up with lots of compromises. A clean installation
of Win2000 would give you a far better and highly robust installation.
About your specific problem: You may have an issue with
c:\winnt\system32\userinit.exe. Either the file is inaccessible by
the user (because of NTFS restrictions), or Win2000 expects it to
be elsewhere. If you have several drives then you can try to copy
it to \winnt\system32 on every other drive, then set the correct
location in the registry in
HKLM/Software/Microsoft/Windows NT/Current Version/Winlogon/Userinit
If you need assistance with the copy process, post again and state
exactly what drives you have and if they are FAT32/NTFS partitions.