Couldn't tell you why you can't read that partition now. Except that I'm pretty sure Win98 copies some files (for Setup's GUI) to hard disk prior to actually installing Windows.

As for setting up a dual boot, I have done this exact same thing with Win98SE and Win2K, on a single drive. PartitionMagic (with BootMagic) made it quite an easy and painless process. If the dual boot is that important to you, or more than once you've found yourself wishing for partitions of a different size or type for whatever reason, it's well worth picking up.