OK...I think the basic problem with windows 98 installation is to format the disk space as FAT32. I've solved that problem. I did as follows:
1- Configured cd-rom device to read from a windows 98 SE iso image that I downloaded from internet. This is done by clicking on the CD-ROM options in your initial parallels screen. Check "read from file" and then choose the .iso file.
2- I've set boot options as "boot from cd-rom".
3- When I've started the VM, I've choosen "boot from CD-ROM", not "boot from harddisk".
4- I've choosen to "start with CD-ROM support" (the terminology may be different, I don't remember it exactly right now; but it is the 2nd choice of 3). Then dos is opened on a:.
5- I found this link. It tells everything about how to format your hd as FAT32. Read it.
http://www.hildrum.com/installing_win98__and_making_a_b.htm
Go to the bottom of the page. The title is "4. Clean Install".
6- Follow the instructions there. If you have problems with format c: /s command, download an .img file that you can use ad floppy image. Where to find it is told in previous messages. (IMPORTANT: If you do not check the "connect at start up" box (which is under the checked "enable" box) in the floppy set up window of VM, floppy image doesn't run. So, make sure you check that box. Also make sure that floppy is your first choice of boot devices, if you need to apply this step.
7- Now, after using the link on the 5th step (and + 6th step if you need), you might be able to format your hd in FAT32 file system.
MY PROBLEMS START HERE.
8- I run DOS again after all of these. Now, I even have the FAT32 format on the disk. I go to "e:" which is my cd-rom (set to read the win98SE.iso file). I write "setup". It is supposed to be installing Windows 98 SE, but the program is stuck at this point. I always have to restart the VM after this. But I tried another thing:
9- "boot from CD-ROM", then choose "start set up by using Windows CD" (again I don't remember what it was writing exactly, but you'll understand what that is) and then a series of operations in DOS end with this sentence: "THERE IS NOT ENOUGH MEMORY FOR THIS SOFTWARE" (or PROGRAM). Well, my RAM is set to 256, which is a very top level that a windows 98 OS can see in its life.
I CAN'T INSTALL WINDOWS 98 SE ALTHOUGH I HAVE THE HD FORMAT WITH FAT32 FILE SYSTEM. I AM STUCK AT BOTH 8TH AND 9TH STEPS. CAN ANYONE HELP ME TO SOLVE THIS ISSUE, PLEASE?