rorpan,
I would suggest, after the format, to copy the win98 folder off of the cd, to the hard drive. Just the contents of the win98 folder though, not any of the sub-directories (it'll consist mostly *.cab files). Then just run setup.exe from your hard drive (probably c:\win98\setup) and it should install without a hitch. In fact it won't prompt you to use the Windows 98 CD ever again, it will automatically look at the directory on your hard drive you installed from.
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Just FYI igiveup,
Windows doesn't know if you are using an upgrade cd. When you enter the registration key, the code you give it tells it. Hence, if you have the upgrade CD, it will install the full version, with no problems, permitting you have a full version CD-Key.