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According to the rest of what you wrote this is a completely inaccurate generalization. Your game only crashes when you put it in 2K mode and vanilla 98SE apps are certainly not meant to be run in specific NT or higher compatibility modes. Depends on what you mean by "vanilla 98SE apps". Epic always listed NT4 as working for this game.
Is this project still in development? I see it's apparently also meant for games. Well, in Unreal Tournament (the first one) ACE developers were smart enough to deprecate pre-2000 support, effectively blocking all of those systems from online play since most servers run this engine. Well, I tried KernelEx 2000 mode on 98SE and the game simply crashes on startup. It works with 98SE mode though, but I doubt this will help anything. Also, I'm running the game through the Glide API, which was still supported on 2000. It's perhaps futile, but I guess it's worth noting here that a contemporary Win98 game does not work with KernelEx Also another question... this application doesn't make any permanent changes to system files, right?