Where are you installing from? Is this a clean installation from CD on a re-formated hard drive and boot disc, or are you reinstalling over the top of an existing installation using the cab files on your hard drive? If it is the latter it sounds like Windows does not know where they are. I think in '98 they were in C:\Windows\Options|Cabs. You will need to re-direct Windows to them if they have been moved.
If you are using a CD there is no reason at all why you should get this message. My ailing memory is however telling me that in '98 Windows used to create a "virtual drive" when using a boot disc and that the CD drive temporarily moves down one letter ie drive D becomes drive E and this is where you should install from using a CD. Perhaps someone else could confirm this.