MIght want to start by making sure you are working with the latest DOSBox version?
Okay - as an old WIN9x pro ...
Sounds like you have an iso image of the WIN98SE cdrom? As previously advised - try imgmount-ing that at D (or 3?)
The setup starts by examining your "system" (personal computer) to see if it thinks your system is advanced enough to run WIN98 ...
If you haven't provided it with a proper C: drive - it will most likely hang ...
A trick that I used back in the day - to solve a lot of side issues - was to xcopy the folder containing all the *.cab files to a pre-formated empty hard disk drive,
and run the setup from inside that copied folder (from inside the destination folder?);
Note - you can place this copy a couple of levels deep in a path structure, such as C:\Windows\[WIN98Cabs or-you-name-it] - just do NOT use a default WIN9x folder name for 'you-name-it'!
I would suggest as advised above - find a suitable "empty" HDD imgmount-able file and imgmount that at C: (or 2)
If you want to do the boot method - be sure to imgmount to 2 instead of C and 3 instead of D, both with nofs flags - then boot the D image.
When I was building WIN98 systems - it always required at least 3 re-boots (close dosbox and reopen?) during the installation process ...
... with loading various drivers and OEM software - I usually ended up re-booting more than a dozen times to get everything set up properly.