Hmm, I did have my Neverwinter Nights CD in the drive, I normally just leave it there since few of the games I play require a CD. Once I took it out the game did start correctly. I don't seem to recall this being a problem under Windows 98, though I may just not have left a CD in for so long.
It usually isn't a problem that I know of, but sometimes it might be if the music is turned on for Space Empires. It will check the CD for audio files and might potentially hang up as you described.
Go into the Data folder and open up Settings.txt. Set the use music from CD setting to False, and it will no longer check CDs in the drive to play the music. This will eliminate the hang up. Also, make sure to disable the music in-game as well in the options menu, just to be safe. You can easily turn these back on later if/when you wish to use a music CD for music in-game (or the normal SE4 CD).