As a matter of personal interest, I tried to install Windows 98 SE on Hyper-V 2008 R2 SP1 today. I came up with the same result in any combo I tried. Which goes against a report I read online that someone said it worked.
It was quite puzzling as I ran the mouse driver in DOS and it said a mouse was detected. I gave up as it was just to have a quick test with.
Sorry it didn't work out for you darkrats. I know that 98 can be loaded in other VM's though.
Edit : After making some changes, I have been able to continue the setup. Mouse still doesn't work (Still despite the fact it's detected in DOS), but keyboard does.
A side note to this : if you click inside the VM window to capture the mouse, it locks setup. Not capturing the mouse still allows keyboard entry to work!
Edited by Raa, 27 December 2012 - 05:40.