Try another disk, if that still doesn't work your floppy drive in the ME machine may be faulty.
(You could try cleaning it out with a can of compressed air from a computer shop but its probably cheaper just to replace the drive.)
As
acklan said, if you are connecting NIC to NIC you must use a Cat 5 cross-over cable.
Quote from XP help:
QUOTE
Before running the Network Setup Wizard on computers running Windows 98 Second Edition or Windows Millennium Edition, make sure ICS is disabled on those computers.
- you will need to do that.
hth