You need to install Windows 98 inside of Virtual PC. Check the
***Virtual PC FAQ*** for instructions for how to do this (if you haven't already).
If you've already installed Windows 98, make sure Windows 98 is running before putting the game disc in. If the game tries to install on your host computer (XP), cancel out of the install. Then use the Windows Explorer (or My Computer) in Windows 98 to browse the CD drive and run the game's Setup manually.