I had no problem with my XP Pro ServicePack 3 computer, other than the unavoidable frustration with dial-up (slowww dial-up < 33.1!). [Even though my location is on the Potomac River (less than 2 hours drive from Mythic HQ... in Fairfax, VA?), broadband service is unavailable.]
With both Windows 98se computers, I received the exact same error message. The latest patch will not work with Windows 98se (or ME). Did some quick research with Google. Found the reason (cited, below).
I do recall a similar situation a while back that was quickly fixed with another special patch for Windows 98 users. Haven't done a search to refresh my memory on that. So, it is possible that a fix might be provided. However, I'm also ready to deal with not using the old OS to play UO, though I'll miss the convenience of using my antique machines and marveling that such a complex game can live on them... until this week.
see URL:
https://support.istaria.com/index.php?act=article&code=view&id=12
QUOTE: "The problem is caused by the latest version of the client using windows functions that were not yet implemented in older versions of Windows. Because of technical issues, a patch can not be released that solves this problem..."
see URL:
http://forums.station.sony.com/eq2/posts/list.m?topic_id=438412&post_id=4884810
I'm not a programmer, but my read on this is that a "function call/request" is being made that does not exist in the Windows 98 system's vocabulary; so the process halts and returns error message.
Be nice if this can be patched. I love to send the ~flying_finger~ to Microsoft by continuing to use Windows 98, especially with a program as sophisticated and communication(transfer protocol) efficient as Ultima Online.
Sharing your pain.