win98se oem generally will complain if there is an existing op system on the drive. Ideally, unless there is something of win95 you wish to keep ie settings you can delete the windows directory and swap file and install win98se clean without using the drive format option (cause i presume you have info you are trying to keep)
To keep win95 settings One thing you can do is go into win 95 and change the swap file settings to use a small swap file like about 64MB for min and max.
do a scandisk then a disk defrag to maximize hardrive space reported to win98se during the install.
If you only have 32MB of memory also try to shut down bios shadow and video shadow and don't use video sharing memory (if it has this) to maximize memory as well
good luck
rick