I have Win98se too which freezes at Win update, but if I leave it for 1-2 minutes it usually works normally again.
Try a IE repair & see if that helps:- Go to Control Panel -> Add/Remove Programs. Click on 'Microsoft Internet Explorer...' & click on Add/Remove. In the box that pops up click on 'Repair Internet Explorer' & press OK. Restart your PC when the process completes.
You have checked with updated ad/spyware programs to rule out this possibility, haven't you? HTH, G