.iso is a binary format which CD burning programs use to save and load raw CD images. Windows may not recognize it because there's no CD burning programs coming with it. But the program you use for CD burning will recognize it. Most of them have an option like "burn data CD" (as opposed to "burn music CD"). The program will then prompt you to tell it which image you want to burn the CD from. You'll tell it to use the .iso file you've downloaded, and it will burn the CD automatically.
When you have burned the CD, just put it into your computer's CD drive and boot from it. Everything will be self-explaining after that. (I assume you booted your Win 98 from a CD. If your computer turns out not to boot from CD, you'll have to go into the BIOS and select the option "Boot from CD" among the boot options.)
PS: Are you sure you want to download this over a dial-up connection? This will take you days for every CD! If you go to a store with lots of Computer magazines, chances are that at least one of them comes with a Linux distribution attactched to it.
For more information, check out
http://www.linuxiso.org . They should have pretty much everything your're asking for.