This is also happening to me with Win98 SE and Forsaken. If i turn CD audio off in the game, it's smooth as butter. Herky jerky when I enable it again. I haven't tried other sound cards besides my other SB16 PnP and it does the same thing. All of these are with the VxD drivers. I've tried a few other processors as well: P166mmx , 200mmx, 233mmx all with the same results. I just disabled CD audio in game and got on with things - I never liked CD audio in game anyway 😀

Motherboard: MSI-5169
Chipset: Aladdin V
CPU: K6-3-400
GPU: Matrox G400 Max
Sound: SB32 non-PnP (CT3930)

Is DMA enabled for the hard drive? Daemon tools attempting to stream CD audio from a cd image over PIO would cause that kind of jerkiness

Just install DirectX 8.1 and all your Daemon Tools virtual CD Audio gremlins will go away!!
DirectX 6/6.1 might also work according to another member here (I haven't tried it yet).

DirectX7 WILL NOT under any circumstance give you In-Game Audio with Daemon Tools, in "Carmageddon 2" & "Disney's Hercules", and most likely others too..
So steer clear of Dx7 if you don't want to be burning physical CDs for these types of games.

I have not tested other DirectX versions.

Also, WDM vs. VXD drivers don't do diddly-squat.. So you can stick to VXD.

If you need a program to change the HDD/Partition letter in Win98, get "Letter Assigner".
You can download it from this post: Re: Do you play games off of their CDs?