Friend of mine had exactly the same problem. He spoke to Microsoft who refereed him to his OEM supplier who happened to be still in busines! It was some sort of conflict with the motherboard drivers. (His was an NEC computer but I don`t know what the motherboard make was.)
The solution was to remove the update from the computer which I believe needed to be done from DOS since 98SE doesn`t have a system restore or another method of removing it via windows. Hopefully someone will pick up this thread and will know how to do it.