Microsoft was planning on building an entirely new Internet-focused consumer version of NT. It was too ambitious for its time, so to meet deadlines, most of it was scrapped and some UI elements were backported into an updated Windows 98 which became ME. This is why Explorer for both ME and 2000 look similar despite having little else in common.
Other elements of the scrapped project made its way into XP, but barely compared to what it was supposed to be. I think XP’s fancy login screen was one of them.
If anyone’s interested I’ll try to find where I read all of this. It might’ve been on Paul Thurrott’s Windows Supersite or another site that collected Windows betas.
It’s interesting to see twenty year old experiments with flat UI designs considering how dominant that style is today with Android 5, iOS 7, Windows 8, etc.
And now many apps use HTML/JS/CSS for styling and rendering.
I think software compat was also lacking. DOS games were still in people's libraries (eg Quake from June '96), and I remember needing an extra 4MB to run those inside Win9x versus booting to DOS mode. That stuff didn't Just Work (tm) on Win2K. For example, http://sandmann.dotster.com/djgpp/DJGPP_W2K.htm is a list of issues with the most popular GCC port to DOS. (The Quake DOS binary was actually built with an earlier version of that compiler)
I remember the WinXP DOS emulation was supposed to be much improved over Win2K, but don't recall specifics.
I remembering hearing at the time that this was about hardware support and/or app compatibility. But my cynical side just thinks they wanted to justify charging more for a workstation SKU for another release cycle.