Ok,
1. created new VM
2. selected Windows and Windows98
3. attached my dos622.fdd to guest setup
4. set boot for floppy
5. booted off my dos622.fdd,
6. fdisked
7. formatted c: and made a folder called c:\win98
8. copied R:\win98\*.* to C:\win98
9. cd c:\win98
10. ran setup
All went fine
Note: the plus to installing from a win98 folder and not cd is you wont have to keep putting in windows CD when installing other items and it needs the Windows CD. Trick i learned from many years of setting up computers.
Of course you can do this after the fact by copying win98 to harddisk folder and updating registry to tell windows you installed from that folder.