Hm! I'm around 95% sure my images are good.
One thought: Do the minimum possible install and see if it makes any difference, and then once you're booted into your install, do additional installs with components you want (OpenTransport, browsers, printing, macintalk, whatever.)
As a side-bonus, installing the minimum set up front will make it easier to clean things out to minimize the systems' RAM use.
With all that in mind, I'm kind of floating back to the possibility that the disk is at fault.
One more possible thought: If you have a PCMCIA to CF adapter, what happens if you try to do the installation to that media? If that works you can just copy the resulting files from the PCMCIA/CF disk to your regular hard disk. If you get an error then then you know the hard disk probably does need to be replaced, or at least formatted such that bad sectors are marked.
(Disclaimer: My own 1400 has the 12x CD drive and already has a newer 30GB hard disk in it.)
Third thought: Do you have an external SCSI CD drive and the appropriate wiring? Maybe give booting and installing from that a shot just for fun, if so.