Do you get the same error when you boot to Safe Mode?
To boot to Safe Mode:
-Start the computer and hold down the CTRL key till the Windows 98 Startup menu
(boot menu) appears.
-Use the arrow keys to select "Safe Mode" and press Enter.

If you do, try the procedures here:
Blank Desktop or Illegal Operations Error Message After You Install Internet
Explorer:
http://support.microsoft.com/?id=kb;en-us;249191

If those procedures do not help, have a look here:
Recovering From a Failed Internet Explorer Upgrade in Windows 98:
http://tinyurl.com/r5ba

Especially this section at the end:

"If you still have boot problems after you reboot, you should use the command prompt
to edit the c:\windows\system.ini file. On the command line type edit
c:\windows\system.ini.

"Once it is open, change the line shell=explorer.exe to shell=progman.exe. What you
are doing here is changing the default shell (that is having problems) from the
Windows Explorer to the old Windows Program Manager shell.

"Reboot Windows. It should now successfully boot with no errors into an empty
Program Manager shell. Use the File | Run | Browse drop down menu selection to
browse to c:\program files\internet explorer and launch ie5setup.exe or ie6setup.exe
(depending on what is there). Do a custom install and check all the Bold faced
options. When the setup program alerts you that these files are already installed,
tell it to reinstall all of the files.

"When the Internet Explorer Setup program is done and reboots, hit the F8 key to
bring up a Boot Menu. Choose Command Prompt and boot to the command prompt. Once
there, type edit c:\windows\system.ini and, once it is open, change the line
shell=progman.exe back to shell=explorer.exe. Save and exit the file. You have now
set the shell back to the original value."

--
Glen Ventura, MS MVP W95/98 Systems
http://dts-l.org/goodpost.htm