|*reading DOSBox's readme.txt*|
Try mounting a file as a HDD, formatting that mount, and installing Win98 to that.
fsutil file createnew c:\some.img 536870912(You need to have admin privileges for this command. If you don't, there are other, slower ways to make a blank 512MB file.)
mountFor each drive listed that's not Z:
mount /u <drive letter>
After everything is unmounted:
imgmount 2 "c:\some.img" -t hdd -fs none -size 512,64,16384
Try running the installer; have it partition, format and install to the 512MB drive. If that doesn't work, you'll have to boot from a Win98 boot disk image.
When it needs to reboot, you'll have to close/reopen DOSBox, then boot off the HDD image. I assume the commands to do that are:
imgmount c "c:\some.img" -t hdd -fs fat -size 512,64,16384
boot -l c