I'm not an office user so I dont know specifically, but I would expect you could install any version of office you cared to install. That would be your decision.
If your Lotus cd is bad, or if you wanted to upgrade it, you can find Lotus smartsuite in a variety of versions on ebay. I've purchased several versions of smartsuite there. The Lotus package will be much cheaper than Office.
Also as I said before, it is possible, but I doubt that your cd is damaged.
As far as win98 is concerned, my feeling from having watched the 95/98 forum for awhile, is that sometimes computer files just get corrupted and you have to do something to fix them.
You could have virus problems, you could have hardware problems, you could have other troubles that I'm not experienced enough to recognize. I've made around 5 installs of millenium versions and all I've had to do is insert the cd and answer questions and everything has run smoothly-so my opinion here is just speculation on my part.
But-your initial error message makes me think that there are software conflicts due to an incomplete uninstall of Lotus. I know that that can happen in other products, so I assume it is possible in Lotus too. The fix for that situation involves manually deleting files and sometimes removing some registry entries as well, and then retrying the install. The registry part of that has some danger to it and it is your choice whether to do it or not. But the first and easiest step is to find out what Lotus files are still on your system. You may not be technical, but you can do the listings I described above, and you need to get that info for anyone to try to help you.
If there are still any smartsuite entries in add/remove programs, they need to go away, either by running the program's uninstall option, or using a utility such as jv16 power tools to clean up the list ( thread615-545642 ).
Any programs in the startmenu should be removed as mentioned above.
The last find step involves finding other lotus files on the system, and my recommendation here will be to delete them all AFTER you have your data backed up ok.
After all that is fixed, then there are two choices.
One is to go ahead and look for registry entries and remove them and then try reinstall, the other is to try a reinstall first and if that doesnt work, go through the file removal process again, remove registry entries and then try the reinstall. If that still doesnt do it, then a post in another forum and asking for other help would be in order, but based on that message about looking for previous version files, i hope that getting rid of Lotus stuff currently on the system will allow the re-install to work properly.