From my experience, you should be able to upgrade using the retail 98SE CD. If the 98SE CD were an OEM version, you would need to format before installing 98SE, but retail CDs should be able to upgrade. We have a retail 98SE CD in the shop where I work, and I know for sure that we've used it to upgrade systems from 98 first edition or 95. And I know for certain that the CD isn't just an upgrade CD, since when doing an install on a blank drive, it doesn't look for a previous version of Windows before allowing us to install it.
JW