i dont understand how you can get setup.exe without windows loading, windows98 requires cdrom drivers to be installed before the cd can be read.
are you using a startup floppy?
have you accidently left a disk in the drive (floppy or cdrom). if so it may be stopping the boot.
as for installing windows again, it usually wont let you install over the top from dos, it will however from within windows (kinda silly really).
if you can get to view the files on the win98 cdrom, look for a file called SFC, if you can find it, double click it to run and it should check and restore missing or corrupt files.