First, are you able to create a character who is a normally restricted race/class combination? As I recall, Elves and Half-Elves could be anything but Paladins, Dwarves, Gnomes and Halflings could be Clerics and Fighter/Clerics, and Gnomes could be Magic-Users.
On the FRUA module list page, there's a column that indicates whether or note a module is 'Hacked'. If its hacked, then you should use a program called UAShell in order for the hacked changes to work properly. Despite its name, FRUA has a number of restrictions, and there are a number of hacks to try and fix them. You can get the program here:
<a href='http://frua.rosedragon.org/pc/uashell/'>UAShell</a>
Its down near the bottom, called 'uashellc.zip'. There's also a 'uashellc.txt' file, which is basically a readme file, if you're interested in it. Unzip the zip file into your FRUA folder. Run the UASHELL.bat file. Some stuff will run; as I understand it, its making backups of the original files so you can back out changes when you work on your own hacks.
Up in the 'Designs' menu, select 'Apply'. This lets you select a set of hacks to use/module to have active. Select the Pools of Radiance .DSN folder. Some more stuff will run, and you should get a confirmation message. Now, there's an option to run FRUA from UASHELL (Designs->Run). However, I have speed problems while using it (its inordinately slow). So instead, I run it through DosBox. I just run the 'Start' program, and everything seems to work properly.
I'm pretty sure I got everything in there you needed. Its been a while since I downloaded the UASHELL stuff. Also, I've found that some virus scanners flag a file or two from UASHELL; however, I think the file(s) just have unfortunate names or extensions, and I haven't ever had problems with them.
As for the .cfg file, mine has some garbage, and then C:\FRUA \FRUA. On my C: drive, I have it setup as C:\games\FRUA\FRUA. When I mount in DosBox, I use 'mount c: c:\games', navigate to the FRUA\FRUA folder, and then run the program 'start'. It seems you need to set the folder name relative to how you have the drive mounted in DosBox, not how you have it set up on your drive. I also assume there's a 'SAVE' folder in your Pools of Radiance .DSN folder; I'm pretty sure one doesn't get created automatically.