Here's a link to an article with all the details over at the MS Knowledge Base:
http://support.microsoft.com/kb/q131652/
Basically, the Registry value that you change is in HKEY_LOCAL_MACHINE/Software/Mircosoft/Windows/CurrentVersion/Setup/SourcePath
You enter the path to the .cab files on your hard drive. It sounds like you have yours at C:\Win98 - if so, enter that path. A path used by many OEM builders is the C:\Windows\Options\Cabs folder. For folks who've installed from a CD, the path is usually D:\Win98. Once you've entered the value and rebooted, any further prompts for the system .cabs will look to the path you've entered first.
. . . Gary