I understand your frustration. I have an upgrade copy of Windows ME that needs my Windows 98SE every time I perform a clean install. Here's what I've done to eliminate that stupid "can't find the files" error:
First of all, prepare a Windows ME boot floppy (you'll need it for CD support). Run FDisk and format and partition your drive (or have two drives installed). In DOS type:
Copy E:\Win98 D:
where E:\ is the CD-rom drive, and D: is your NON-OS partition. Once you've copied this folder, you can remove your windows 98 CD and put in whatever upgrade CD you need. Then type:
E:\setup.exe (at least that works for the Windows ME upgrade), or reboot with your upgrade CD in the CD drive. When you're prompted to insert the old CD, click browse and point it to the D:\win98 folder. Problem solved. Once you're done installing windows, just delete the files in the D: drive.