Sorry to drop in on this discussion like this, but started working on what you're talking about here around 3 weeks ago and I've got it done now (this forum might have helped me had I seen it before this evening). I got inspired by Knoppix (actually damn small linux) and decided to make a credit card sized windows 98 cd. There was no reason why we couldn't do something similar with windows, and it would necessarily be better looking than that ugly as hell knoppix web browser; I REALLY couldn't get over the file manager and I think that's what led me to attempt this on windows 98.
Right now I've limit my cd image to around 49 MB, so when I cut it it fits right next to my maxed out Visa Card. It loads windows on any computer with 128+ MB ram, supports creative audio cards and NVidia and later ATI vid cards ( it seems to support a whole lot of net cards too). I've got divx support in winamp . Opera 7 web browser and email client, a nice hex editor, reg shot, data rescue (a fabulous low level undelete tool which someone now makes you pay for - I've got the last free verison here), partition magic 5, grisoft antivirus, Miranda IM (Gnu messenger that hooks into all the major services), explore2fs, NTFS (winternals program to read/write ntfs on win98), a freeware zip tool, ezdrive, and a paint program, and the last free version of Haim's net meter.
As it turns out, that c't magazine article was mostly right; there were still some conflicts with things they didn't even mention. The little idea about not lighting up the a:\ drive LED is dead wrong, there is a major conflict between windows drivers and the El Torito spec. I had trouble with that until I found a little work around.
as of now, I've got 0, that's right zero error messages. I could still make it better if I had a little help from someone who knows a little assembly language - right now I'm running HD access in real mode but with the right assembly call I can allow protected mode - just need someone who can help me figure out a couple lines of code.
I would consider putting the image out there but someone needs to host it (I don't want the potential bottleneck that I would have on my dsl server here) and whoever downloads it is doing it at their own risk. It is not hard to modify the installation and like someone already said there are ways of avoiding hardware detection, running 16 color 640*480 video with decent fonts, etc. That will also save you 10+MB on the image - which means you can make a really small business card out of that.
I know that it would be pretty easy to make a full sized cd that would work on a system with less memory - maybe 64 or even 32 with some work, but I'm not terribly interested in that for the present time. I just had a little peek at the registry and I think we could really make that _fly_ though - doing something like what that c't article said but more elaborate, while avoiding stupid disk full messages. maybe I'll work on that in august when I've got some vacation time :>
Let me know what you think and if someone knows about assembly, please post a message here - we need to talk.
I think I may write a tutorial about this sometime soon, also, so keep your ears peeled.
Semios