Alright. I've gotten closer. Here is how, and here is also where it stops now. Maybe some Windows guru can help.
The freedos.fdd file provided in an earlier post will not work with my Win98SE CD because setup.exe (and Workstation, for that matter) expects the hard disk file to be the C: drive. But the software on the freedos.fdd file uses a ramdisk app called TDSK.EXE or Turbodisk that automatically sets itself up as the C: drive. Because of this, fdisk won't work, setup won't work, it all falls apart.
So, what I did was to find out how Turbodisk does its thing on the net, and along the way, I found a different ram disk called xmsdsk.exe. This one allows you to set the drive letter for your ram disk. I edited the FDCONFIG.SYS and AUTOEXEC.BAT files so that it ignored the original ram disk software and used the new one. It took some jumping through hoops to get the new files downloaded, put in an .iso, and installed into the .fdd files, but I did it. I never thought I would need my ancient DOS skills, but its all coming back to me. <shiver>
Well, anyway, once the FreeDOS floppy booted, made its ram disk and installed a full system, I was able to run fdisk on the hard disk file, assign it a drive letter and format it. At that point I ran SETUP.EXE from the Windows 98 SE .iso file I made from my CD. It began hopefully, and ran scandisk, found no errors, then began copying files it said it needed to install Windows. After a good deal of time (20-30 minutes) it finished, and the screen flashed then went back to black with a line that says "Error loading PROGMAN.EXE", and then it dumped me back into the D: drive (the Win98 .iso).
That is the farthest I have gotten in my quest to run Windows on an Intel Mac, for sure, and I have a feeling that I may be very near the end. As for this PROGMAN.EXE, the 'net says its a program shell used in Win 3 through 98, and can be found as an option in almost all other versions. Is this PROGMAN.EXE supposed to be present in the FreeDOS system running the VM? Anyone know what I should do about this?