There are 2 inds of upgrade disks. One is for upgrading an installed Win98 to Win98SE.
The other can fully install if you have a previous qualifying Windows product available, but it does not have to be installed. It merely asks you for the old product to be inserted briefly when prompted during the install.
Since I am unsure what you have as far as the "upgrade CD", I would suggest a format with a Win98SE boot disk (free at
www.bootdisk.com) and then try to load the Upgrade CD with d:\setup, to see what happens.
If this doesn't work, you obviously have the older type of upgrade and will have to install the old Windows first. But give this a try!