I suppose your ISO works fine if you burn it onto a CD and use the CD to boot up.
You can try again with the grub4dos menu entry above, along with such a CD in your CDROM drive. If succeeded, then it means that your protected mode Windows lacks a driver for the ISO, and thus it cannot treat the virtual drive (0xFF) as a cdrom. Windows can access a real CDROM disc media, but it cannot recognise the real-mode eltorito int13 drive of (0xFF). You need a protected mode driver for the virtual CDROM of the ISO.
You can avoid using the ISO. Instead, use a hard drive image or a floppy image. Windows 98 can recognise a mem-mapped HD image without a protected mode driver. But cannot recognise an mem-mapped ISO.
Suppose there are no protected-mode drivers for the mapped drives. Then (HD or FD)images must be mem-mapped or mapped with the --in-situ option. Otherwise Windows 98 cannot successfully start up.
Someone told me Windows 98 cannot boot up with more than 2G of the memory. You have to reduce the memory or use int15 to hide the memory that is above 2G.