I have an MP3 player which I know isn't an Ipod - but it basically does exactly the same thing. I also have Windows 98 SE and it works fine, no probs at all.
I don't think actual ipods -as opposed to some other mp3 players - are compatible with windows 98, because you need iTunes to use them. You can use them with win 98 in disk mode, though, but you have to install some software first. (I can't remember the name of the software, will check when at home if you want.)