That version of Win98 sure is self-booting, but something apparently goes utterly wrong when MS-DOS 7.1 is trying to
load or access the CD-ROM drivers or process autoexec.bat and config.sys in general.
Just what it really is, that's the question. While unlikely, it could be related to a 1.44MiB floppy image that's a part of Win9x CDs (see EL-Torito).
That's why I recommended to try a real diskette, too - just to make sure that's not the culprit.
If it is related to something else, like the IDE controller (host controller), changing the BIOS settings could help:
As a last resort, someone could try to disable all advanced IDE settings (32-Bit access, block mode, Ultra-DMA, PIO modes lower than 4).
Connecting the IDE drive to it's own cable could also help (no master/slave setup).
Speaking of FreeDOS, I don't know if it uses a similar floppy emulation or a something else.
In either case, I'm afraid it is not very compatible or stable if used as a foundation for Windows.
It may boot Windows 3.1 (in Standard Mode), which Mini.cab of Win98 is based on, but I'm unsure what happens after this stage.
Win98 setup may or may not be able to copy DOS 7.1 to the hard disk if it was started from FreeDOS.
Sorry, that's all I can say for now. 🙁
Edit: I remember MS-DOS 6.2x was released on CD-ROM, too. Perhaps it can be installed on that machine more easily.
If it boots, it's just a matter of copying the win98 setup directory to the DOS partition (C:\Win98) and afterwards
run setup from there. The copying can also be done from another computer (with an SD/CF card as HDD this is easy).
Later on, the partition can be converted to FAT32 and enlarged by Gparted (0.8 or older).
Edit2: Sorry, I forgot - Some versions (OEM or non-update) of Win98 refuse to install if an OS is present on C: .
In this case, skip installation of MS-DOS. Instead, just create a primary partition using FDISK and run FORMAT C: /B .
Then, just re-boot MS-DOS from the CD-ROM, leave DOS setup (press F3), go to C:\win98 and run setup.exe .
The /B parameter of Format reserves space for a future DOS boot code, but doesn't copy system files.
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