OK let's see... about your CPU, make sure that you set any/all jumpers to what they are supposed to be (I.E. is your processor 200 or 266MHz FSB? if it's 266, then set the appropriate CPU jumper on your motherboard to 133MHz, otherwise it's on 100MHz) Also, make sure that your multiplier is set right (I think it's 9 for a 1.2ghz 266fsb chip??) and go into your BIOS and make sure everything is right, also, front side bus, and multiplier, etc.
Also, for booting up, if you are booting to IDE-0 this is wrong, I believe IDE-0 is the channel for your Hard Drive, which obviously contains no data. You need to go into your BIOS and set the boot order to where it boots to either floppy or CDRom first, but definitely make sure that floppy comes before IDE-0 if you are using the 98se setup disk.
Also another thing, in order to format your hard drive with the Windows 98 setup disk you will have to add some files onto the disk that aren't already on there from the manufacturer. These are format.com, fdisk.exe and I always add edit.com just in case something goes bad (with edit you can edit files in DOS-based text editor, good for things like Autoexec.bat, etc).
Also, if you are getting an error for i/o on the floppy... look at the light on the floppy drive, is it constantly shining no matter what, or does it only come on when the drive is reading? if it is constantly shining, you have the cable plugged into the drive backwards, and need to flip it upside-down.
OK, after all of that this is what I recommend you do...
1.) Fix your CPU stuff like I mentioned earlier
2.) Go into your BIOS and set floppy drive to boot first, then CDrom, then hard drive (IDE-0)
3.) restart computer with your modified Windows 98 Setup floppy disk in, when it asks what you want to do tell it to start the computer without CDROM support.
4.) when you receive the prompt for A:> then you need to type fdisk. follow the instructions blah blah blah and creat your Primary DOS partition and make it active.
5.) restart your computer after FDisk tells you to by pressing CTRL+ALT+DEL
6.) repeat step 3. and then this time when you get to a: prompt type in "format c:"
7.) ok, now you should have a formatted drive. Take out the floppy after everything is done (I.E., you're back to the ready A:> prompt), insert the Win98 CD into the drive, then restart the computer again.
8.) you should probably see the exact same message from the CD that was on the floppy. This time select to start windows 98 setup from CDrom, and then it's pretty simple after that
Hope this helps, let me know if you run into trouble, you can PM me if you want.