Yes, installing Win2K in another folder/partition will let him see the files. But why not work on the error message, instead. Now that we know what it is, the fix might be software related.
Ntoskrnl.exe missing/corrupted often means a problem with your boot.ini file. That file is on your C: drive, no matter what other operating system you have.
Your boot.ini file might have gotten hosed somehow or is missing in action. Look in your C:\ folder for boot.ini. With a dual-boot OS, your C: drive would have to be fat32 (fat based, anyway) because Win98 needs to boot from C: and can't read NTFS. So, my point is, we know your C: drive is a FAT drive. So, boot.ini should be visible to you.
Look in that file and make sure it's pointing to the proper location. It can be cryptic, if you don't know what you're looking for.
Why don't you do this? Copy/paste the contents of your boot.ini file here in a reply. Then, be specific in telling us exactly what hard drives/partitions are on your system, so it can be checked against your boot.ini file.
Here's my Boot.ini. It's set for dual-booting Windows 98SE and Windows XP Professional. Win98SE is the default Operating System to boot to, and the countdown timer is set for 5 Seconds:
[boot loader]
timeout=5
default=C:\
[operating systems]
C:\="Microsoft Windows 98SE"
multi(0)disk(0)rdisk(1)partition(1)\WINXP="Microsoft Windows XP Professional" /fastdetect
I have 2 hard disks, C: and D:. Windows 98 is on C:; Windows XP is on D:. 2 Hard Disks and a total of 2 partitions.
To me, if you're confident that you can get to the files because you think some "system" files are corrupt, then fixing this issue should deal with your current bootup problem.
See this page from Microsoft for more info:
Ntoskrnl.exe missing --MS info