be aware you cannot install win98se onto an ntfs partition it must be fat32 otherwise its impossible , you can convert it to fat32 without data loss with partition magic/acronis disk director suite/or maybe even the windows xp builtin disk managment not sure about it , or if you dont care about data loss just delete the partition/s of it and recreate using windows disk managment , and remember its first partition or only for whatever it matters must be primary and not extended , anyway make a new folder and insert the win98 cd and explore it and copy everything to that new folder (but make sure you have "show hidden files and folders" checked on folder options first) and download cdimagegui from
http://unattended.msfn.org/unattended.xp/view/web/15/ and this custom 98se bootdisk image
http://hyperupload.com/download/017cc51a66/98sebdisk.ima.html (scroll bit down and look on the left)
do as shown on that cdimage page but of course change the paths,and use that 98se bootdisk image instead of boot.dat and also on label put same label that your 98 cd have , and just create the iso and burn it then boot from it after done access the cd drive (R: for first drive S: for second , which one in your case that depends on if you got only 1 optical drive and also on what comes first) anyway after you type drive letter: for example R: press enter then get into the folder of the setup which i think is ena (just have a look,also you can use \ with the cd command for example cd test1\test2) anyway access the installation folder by typing this and pressing enter afterwards
cd ena
after your in the folder type this and press enter to start windows installtion: setup
after setup restarts to continue the installation get into the bios and move the optical drive down on the boot order so it wont boot from it again
edit i suggest youll temporarly disconnect the hd with xp just to be safe , before installing 98 , and after its all installed reconnect the xp hd and use some boot manager
edit2 might wanna consider installing it using vmware , so youll be able to work with 98 from xp