I never used Arcadeos before, so I could be way off base here. I'm wondering about the I-Pac you have, if it's the older or newer version? The older version I think had dip (jumper) switches and the newer ones don't. Are you using a USB cable? If it works fine in Win98 SE then I think it may be USB if not then it sounds like it's a dip switch problem, check it. To run your I-Pac in DOS it has to be a Serial device using mouse drivers.
The reason I ask is if you are booting into DOS, the one that came packaged with Win98 SE, then USB devices will not be recognized. With that in mind if you use the pass-through on the I-Pac then DOS will not find a keyboard. If DOS doesn't find a keyboard then your comp will freeze. DOS needs a keyboard to run, the mouse is optional.
I don't know if this helps you any or if you allready knew this, but I'm surprised that no one has ofered you any help.
PhotoRock