Did you FDISK and format the drive for FAT32? You said you had XP on the drive. Ergo it is probably still set to NTFS file system, which XP uses.
Dont just format it, FDISK it forom a 98 bootable media to delete and recreate the partition, then format it
No, I cleared the partition table and made a new FAT32 primary partition spanning the whole drive.
I'm at a loss as to what happened, I've installed Win9x probably a hundred times (though not in the past 15 or so years) and just nothing was working. Not from the 3 discs I had (one an official Win98 disc I've had forever), they all gave the error. That was an Athlon XP 3200+ I had hoped to use as a kind of ultimate Win98 machine, basically what high school me would have killed for. I guess it wasn't meant to be though, I found a Duron 1GHz board and it works so I guess I'm just giving up on the 3200+.
The good news is the Duron absolutely kills the games I want to play even in software rendering. I don't know what framerate I was getting in NFS 2 and Quake 2 back in the day, but the Duron can render them in software more at what must be full framerate.