The only thing I can think of is you're doing something in your setup that isn't liked (obviously) but why it would cause it to loop, that I'm not sure of.
So, just to make sure:
1) Your autoexec.bat and config.sys has *only* the bare minimum needed for starting properly (himem.sys, sound drivers and sound declaration, etc)
2) The PATH variable is set correctly in your autoexec.bat
PATH .;c:\dos;
be sure that period is there, it states current path as the first place to look.
3) at the end of autoexec.bat, it changes to the AOD dir
cd \arcadeos
then launches in the next statement
arcadeos