VMWare Player is a free application that lets you set up virtual machines on your computer. Think of it as setting aside a little bit of space on your hard drive and making that little bit of space believe it's a whole separate computer.
Onto this virtual space you install a whole separate operating system. For nostalgia freaks like me, it means I have a functioning Windows 98 machine on my Windows 7 machine (provided I have a valid W98 disc to use during install, of course!). I find that more complicated games don't work right through this method; X-Wing and TIE Fighter CD's don't work great for me this way.
The other OS I'm mentioning here is Ubuntu, which is a version of Linux that is a) free of charge and b) very user-friendly. You can create a VMWare installation of Ubuntu relatively easily and it's totally legal.
Once you have your Ubuntu virtual machine up and running, you go into Ubuntu and install WINE from Ubuntu's "app store." WINE is a program that lets you run many Windows programs through Linux. When I used to run a 100% Linux computer, WINE saved my butt several times when I needed to run a Windows program.
So, basically, you download VMWare Player. You download Ubuntu and burn it to a CD (does one have to do the burning still?). You install VMWare Player and use the Ubuntu CD as the OS. Install WINE from the repositories/appstore, then install COTW, and... voila? This should work.
I realize everything I just typed sounds very complicated, but I'm trying to get around your complaint about having to buy a Win98 key. I haven't messed with VMWare installs much recently, but when I did so last summer, it turned out to be pretty painless and kind of fun. Plus, Linux is a whole other OS, and those can be fun to learn!
All of this would be easier if WINE ran on Windows, but it doesn't. All of this would be further easier if MS would do something to allow for basic, addable backward compatibility with their really old stuff. DOSBox is GREAT for pre-94 DOS gaming, but it leaves Win3.1 stuff a little flat.
Oh, and I just checked my VMWare, and the latest Ubuntu it's compatible with is version 10.10, which is still readily available, I'll bet! (EDIT - Huh. Apparently not. 10.04 is, though, and as it's a Long Term Support release, I'm sure it still has a WINE variant that will run on it just fine.)
(Disclaimer - I haven't actually tried exactly what I'm recommending here. It was a SNAP with Win98 and VMWare Player, and Ubuntu+WINE should be able to handle COTW. But I might be completely full of it and I might have just typed a really, really long response that's totally wrong. Who knows?)