It's certainly possible that the drive has simply failed (not unusual for an older drive). Try several different CDs, and (to be extra thorough) try attaching the cd-drive in a different PC. Also -- see if the drive shows at all in "Device Manager". Right-click on your "My Computer" icon, then select "Properties", and then "Device Manager".
If the CD-drive shows up in the list, try removing it (select it by clicking on it, then select "Remove") --- then reboot: it's possible Windows will be able to re-detect it & it will recognise CDs again.
For more thorough troubleshooting of disappearing CD/DVD drives, there is an excellent article from Hp/Compaq that covers most of the bases (has screenshots & all the details) --- http://h10025.www1.hp.com/ewfrf/wc/fastFaqLiteDocument?lc=en&cc=uk&dlc=en&docname=bph07146
Often the culprit is Cd-recording software. On newer systems (Win2000/XP/Vista) the culprit can also be media player software (notably iTunes).
Best of luck
. . . Gary
(Note --- you may see references around the Internet to fixes that change an "Upper Filters" & "Lower Filters" value in the Windows Registry = as far as I know, these fixes usually work best with Win2000/WinXP, and not Windows 98 -- but I haven't seen this issue in a long while).