A recovery disk ought to contain the complete operating system plus whatever 3rd party software came loaded on it. If I had to guess, I'd say the recovery program is balking because it's finding the boot loader for the win 2k installation, and is erroneously thinking someone is trying to use the recovery disk on a different machine than the one it came with. See if there's an option to reformat the hard drive when you try the recovery disk. If so, reformat and then try installing win ME again. If there is no option to reformat the disk, then the first thing I would try if I were you is to take the hard drive out of the machine and have someone vaguely computer literate put it in their machine as a slave drive. Once they do that, they ought to be able to format the drive. If so, then putting the drive back in your machine should allow you to use the recovery disk.
Or, realizing that ME is junk, you could reinstall win 2000 (preferred) or even win XP. I'm guessing the 2000 install got viruses and/or spyware, both of which can slow it to a crawl and cause all sorts of interesting and varied crashes, with or without error messages. Whatever you end up doing, put some good (NOT norton or mcafee) virus protection on there. If you need more advice on what to use, ask in this thread and some of use will no doubt have some suggestions.