I boot on FreeDOS, switch to D:, and run "install /p j" or "install". The windows 98 install screen is displayed, and an error appear telling: windows 98 requires a computer with at least 16 Mb of memory.
Booting from the Windows 98 install CD works, both when FreeDOS is first installed and when it is not, surprisingly.
If it works from the CD but not from the install files, then the problem is because the CD is loading some kind of driver on boot (probably XMS via
config.sys) whereas your default boot is not. You should be able to fix it by copying the contents of
autoexec.bat to your FreeDos boot-up environment. You should also check to see that FreeDos is not loading extraneous stuff.
I have burned an ISO of my Windows 98 install CD because I don't manage to connect my CD device to the virtual box.
The CD image you created was probably not a valid CD image or was not bootable. Try ImgBurn, VFD, BCD, or CDIMAGE. Just make sure to select the
bootable option when creating the image.
My Windows 98 install CD is a basic one, not the 98 SE one.
I'm not familiar with all of the intricacise of Microsoft licensing, but I believe you should be able to download and use a 98SE image if you have a legitimate 98 key. If you have a copy of XP, you can download SP3 without having to buy a new copy; you should also be able to download an ISO of XP with SP3 pre-installed without it being considered piracy. The SE release of 98 was effectively just a service-pack for 98.