So it turns out that my problem has something to do with the SB Live! drivers I have installed... If I manually kill the process "Devldr16" then the computer reboots in MS-DOS mode right away.

I need to find out which version of the driver works on my machine.

I haven't experienced this issue exactly, but for whatever it's worth a lot of times I've found that "Restart in MS-DOS mode" produces an seemingly unclean environment. On several of my systems I'd find games that simply freeze the system on startup. However, if instead I have Windows present a boot menu at start up and I just boot directly to DOS everything works fine. Plus the config can be tuned for each mode more easily. Given that I don't recall as many problems in the past I'm sure it's a case where finding the right driver older versions would help, but in my opinion it's worth considering if the "Restart in MS-DOS mode" option is overrated.

Yes I agree that's the way to go. I just would like to make it work as it should, i.e. not freezing when try to switch to MS-DOS from the start menu...