According to this MS link it could be due to a damaged wininit.exe file in c:\windows
You can extract this file from a Windows98 CD by booting with a startup disk (watch to see what drive letter gets assigned to the CD-ROM -- normally it will bump up one)
Insert the Windows98 CD and use the command:
extraxt /a e:\win98\base4.cab wininit.exe /l c:\windows
This assumes 'e' is the letter that gets assigned to the cd-rom drive
Alternatively you can try copying that file from your Win98 installation to a floppy disk, substitute that for the startup floppy (after booting with the startup floppy) and enter:
copy wininit.exe c:\windows
If restoring wininit.exe doesn't help, I would try restoring a previous registry. To do that, press and hold the ctrl key starting up (no boot disk here) until the boot menu appears. Choose the "command prompt" option. At the c:\> prompt enter
scanreg /restore
use the arrow keys to select a prior started registry.
If that doesn't work, you will probably have to reinstall Windows. You can do that by booting with the startup disk, inserting the Windows system CD and entering (from the a:\ prompt)
e:\setup
http://support.microsoft.com/directory/article.asp?ID=KB;EN-US;Q141898