Firstly you do not need to fdisk or format a virtual drive. When you go through the creation of a virtual drive you must tell it that it has to be used for Win98. After you have create the virtual drive in Virtual PC then start it up, just after you have done that then you need to capture either your CD ROM drive (which should have the WIN98 CD in it) or if you have created and ISO file of the WIN98 CD you can use that. This should allow you to install the OS.
If you have any questions then please reply to this
Right I have now figured it out, I have not done this in a long time
Firstly you will need a Win98 bootable floppy disk with FDisk, Format and CD ROM support on it. this can be found http://www.bootdisk.com/bootdisk.htm
You will need to download the Win98 SE OEM. This will have the necessary files. When you run this program it will format the floppy disk and put the correct files on.
Create the Virtual HDD, make sure that it is bigger than 205MB, I used 300MB and that worked.
Start the Virtual Machine, Capture the floppy drive, you will not need to select CD ROM support the first time that you boot as you will be using FDisk to create the primary partition.
Once you have created the primary partition you will have to reboot.
After rebooting format the C drive, then change to the CD ROM and run setup.
I hope that that is a better answer