Yup. You can get a second opinion on that issue...
First of all: We now learn that you cannot install any other OS'es than the one bundled with the machine on a 'recovery cd' - Not 2K, not W98, not DOS (??)
And not Linux...
Okay then. I'll now retract my earlier suggestions - all of them! I no longer believe there's a problem with the RAM. Nor is the PSU perhaps overloaded. And the graphics adapter is not at fault either.
If you cannot install a standard out-of-the-box W98, something else is wrong.
First of all, you need to get access to the bios setup facility. Compaq - like several other brand-name manufacturers - most likely have proprietary routines you need to execute to get 'into the bios'. Pressing 'Del' or 'F2' during POST/boot will not neccesarily do the trick, as with all the standard motherboards from eg. ASUS.
You may have to get a floppydisk or the install-CD and boot from that one in a special way to enter the bios. If the manual doesn't say, try Compaq's support - web or hotline. But i'm 99% sure it isn't 'locked'.
But hey... You tell me. You know; i'm merely guessing here
But i think you need to dig into this subject - thoroughly. I can't help you there, as i have no knowledge on the specific area.
Start out by figuring out how to do a BIOS upgrade. Compaq provide 'softpaq's, 'Carepaq's, 'Infopaq's and similar 'XZYpaq's for various maintenance purposes. There's also a bios maintenance paq and an instruction on how to apply it available.
Now gain access to your bios. Look around. Tinker with the various settings and make other installation CD's work properly. You should at least be able to /start/ a W98 or W2K installation.
No. There's no 'modified' XP kernel. Most likely the bundled recovery CD has a bootsector-thing which does some sort of check agains the hardware it's running on. You know; to prevent people from 'accidentally' installing a copy of the 'OS' (harharhar...) on a machine onto which it's not licensed to be installed. After all this is OEM-ware, right?
Your W2K disc is a standard CD from Microsoft? Not one that came with another Compaq/HP/IBM/Dell/<brand-name> PC? Recovery CD's from other compaq's are highly likely to NOT work!!!
To investigate this issue, get hold of a STANDARD (NOT recovery) installation CD with eg. W2K or W98.
I repeat: STANDARD. Not Recovery-anything of any sorts...
Then try installing it. But not before you've poked around in the bios settings.
Removing the battery overnight? Why not use the jumper labeled 'Clear CMOS' as stated in the manual?