Just so I'm clear - you can boot from floppy, right?
So if you boot using a Win98 install floppy, then you can exit to the DOS command line and use FDISK to delete any hard disk partitions. Then reboot and see if the machine will then try to boot from the CDROM (because there is no longer an active hard disk).
If not, then use the Win98 install floppy to boot to the DOS command line with CDROM support enabled. Try to find a file on the WinXP cd called "setup.exe" (or "install.exe" or something reasonably self-evident), and run that. With luck it will start the process. At least you will be able to find out if the CDROM is working (maybe it isn't?).
It is also possible that you will have to manually create a partition and format it via the DOS prompt, but I don't think that is required or even helpful.
Of course if you can't boot from floppy the above won't help!