Some things you could try:
See if you can copy the contents of the \Win98 folder onto the hard drive, and run setup from there. Setup is touchy about CD reading, and a copy may get past on the error correction. I expect for Win98 you're probably already using a CD enabled DOS bootdisk. If you're not accustomed to DOS commands, once booted to the A: prompt you'd type MD C:\WIN98
then copy D:\WIN98\*.* C:\WIN98
, changing the D: if necessary to match the drive letter assigned to the CD drive. (It's vaguely possible you may also need the \drivers folder - but I never have found it necessary.)
If the drive in the system is a CD drive, and you can temporarily substitute a DVD drive (DVD-ROM or burner), try that. A DVD drive has more robust error correction than a CD drive, and may be able to read the disk.
You can buy scratch restoration kits for CDs, or some music/video stores have the facility to do scratch treatment, this could be worth a try.
Edited by Platypus, 13 May 2006 - 05:58 AM.