Windows 98's CDFS auto-detects disks when inserted, so Explorer can properly update the drive and folder windows. It also looks for an AutoPlayer on the disk (autoplay.inf) and will launch it. Because of this continuous checking, the CD-ROM drive light will flash. If it's an IDE drive, your HD light will flash along with it.
You could use real mode CD-ROM drivers and MSCDEX instead, but this leads to very pathetic performance.
"Start|Settings|Control Panel|System|Device Manager"
Click on the + sign in front of CD-ROM , double-click the CD-ROM and choose the "Settings" tab. Uncheck "Auto-Insert Notification".
TweakUI (Powertoys) also lets you turn off autoplay, but it does not stop auto-insert notification, so it won't have any effect on this