AA,
There's a file in the WIN98 directory on the Windows 98SE CD called Setup.txt, and in that file (toward the end) is the following:
Message SU0168
Your computer already has an operating system installed,
which cannot be upgraded by this version of Setup. Please
obtain the Windows 95 (or Windows 98) Upgrade.
This error can occur when you are attmpting to install an
OEM version of Windows 98 over a previous version of Windows.
-or-
An application has installed an OEM version of SetupX.dll
that makes it appear that your current version of Windows is
the OEM version.
If you suspect this is the case, replace SetupX.dll with the
correct version from your current install media.
1. Place your Windows 95 or Windows 98 CD in your CD-ROM
drive.
2. From a command prompt, change to your CD-ROM drive letter.
3. Type "Extract /a base4.cab SetupX.dll /l c_:_ \" (nb underscores added to avoid smileys)
4. Copy the SetupX.dll from your C: to your Windows\System
directory.
5. Run Windows 98 Second Edition Setup again.
Sounds like your problem!
Although if you could get hold of Win 2K (and have > 128 MB RAM) that is what I would recommend - I have an elderly Toshiba 480CDT (Pentium 2, 233 MHz) that is still happily running Win 2K much better than it ever ran Win 95!