I have managed to successfully get a true Win98 DOS session as an alternative OS on the WinXP boot menu but it was a little complicated. Windows98 still wouldn't boot though.
I'd suggest booting from a Win98 bootdisk and changing WIN.COM in the windows (WinXP) dir as this worked with older Win ver in that they then couldn't detect the presence of another Windows installation.
You could then install to C:\WINDOWS.98 or D:\WINDOWS (partition 2) if not offered early on in the setup process try typing {CDROM}:\SETUP /? for a list of setup options which should help.
Bear in mind that you won't be able to access files in Win98 from C: if it's NTFS. Also Win98 likes (maybe needs) to be on a primary partition and preferably the Active partition. Disks are only supposed to have 1 primary partition and you may find Win98 won't like there being 2 (1 for WinXP & 1 for Win98).
I would strongly rec getting a cheap (and smallish) 2nd hand disk and doing a Win98 install on this. It is a much safer and better solution and you can choose from BIOS which disk (and therefor OS) to boot from.