Size of the hard disk? Did you try re-partitioning? Any Drive Overlay Software installed?

If everything fails, setup has various parameters to skip health check (use /?).

How are you booting to the dos prompt?
that's to say is emm386 loaded? Pretty sure it needs to be (I've always used a win98 boot floppy, even with the cab files on the HDD so could be wrong)

No, EMM386 should not be loaded. Setup works best with no startup files at all.

I'm running it from a bootable 98SE disk and attempting to run the setup from the Windows setup files I've copied over to the HDD. HDD is 2gb.

I am starting to suspect the CD drive in the laptop I am using may be dying and not reading all the drivers/files from the disk correctly as sometimes it takes a few goes to make it boot from the CD and hangs/gives read errors at different stages.

oeuvre wrote:

http://i0.kym-cdn.com/photos/images/original/001/271/219/9ac.png […]
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I love this, permission to steal it? 😁

It was the laptop's CD drive playing up in the end so I guess I'll be on the lookout for a new one now.

It's from this http://windows95tips.com/

oeuvre wrote:

It's from this http://windows95tips.com/

That's going in my bookmarks! 😁

I load Himem.sys when I install 9x

That's a good call... not strictly needed I don't think but one of those things that's nice to have. I've built myself an ISO based on "The Windows 9x Project" that can install 95, 98, 98SE or Me, with 98lite on the disc and the required Win95 files ready unpacked and also Himem on there too.