First of all the good news: the fact that it didn't crash when booting from a floppy is a good sign.
You seem to be able to get to an E prompt but setup then crashes. Yes?
Okay, let's take this step by step:
Boot from floppy.
At A: type the following, pressing enter after each line:
E:
DIR
What happens? Anything? Error msg? Can you see the Win98 directory?
If it went okay type:
cd win98
setup
This will be another copy of setup.exe. If the original setup.exe is corrupt this just might work. Although it's a bit unlikely that E:\setup.exe is the only corrupt file on your CD. But there's a chance. (Incidentally, you could just try copying over E:\win98\SETUP.EXE and or E:\setup.exe to a floppy disk - not sure if it will fit. In order to copy it it has to be able to read it. So if it can't copy it it ain't going to run.)
Also, you need to find out whether it's just setup.exe that is the problem or does this happen with all .exe files. You gave this impression earlier but have you experienced this or are you generalising and assuming coz it didn't work with the win98 setup.exe that all executables are out? Try running at the A: prompt
fdisk /status
Did it crash or what? If it was okay then it's not executables as such that are the problem.
So, to narrow it down further, and check out if it's executables from CD ROMS that are the problem: try an executable from an other CD (doesn't have to be W98). Does it run? If so, then, as edfair says, it's time to look at your Win98 CD.
Finally, you can either try the CD in a friend's CD drive or borrow another copy of W98 and see if that works. If the former works it's time to start looking at your CD ROM drive. If the latter, throw your own CD far away. However, the fact that you are using the library to write these posts does not indicate much likelihood of being able to do either.
Incidentally, bad clusters don't get fixed. They get marked so data does not get written to them and as a result the data becomes inaccessible. In the old days a few bad clusters were to be expected, not so with modern hard drives. Keep an eye on them - if they start to increase it could be an indication of imminent h/d failure. The fact that they move around is weird. Makes me think you have new ones and it missed the other ones this time around!
How did you find out about the clusters? Ran scandisk from A: ? That's an executable.
You're still not answering all the questions - e.g. did you try to boot from the CD? (Mind you, seeing the problems you have that's unlikely to work but try to rule stuff out and confirm other stuff as you go) - but if you have to go to a library I can appreciate your difficulty.
Hang in there.
Dermot