My Win98SE CD is upgrade too and runs from DOS without problem, and the error you're getting means the disk is locked according to
http://www.computing.net/windows95/w...rum/73059.html. This site also states setup may be run from DOS, but disk must be unlocked else you get the SU991010 disk locked error. Your assumption disk is still unlocked after reboot is mistaken since Windows locks disk on boot. The disk must be unlocked and run setup without restarting the system in order for setup to access the disk to run. BTW this site also suggests low memory can cause many SU99xxx errors, and it could be you don't have enough memory since you didn't state memory you have.
In the past I've encountered inability to run some programs due to locked disk, and unlocking disk has always resolved the problem. Reinstalling current version will likely be a waste of time because the problem is obviously locked disk.