I've seen scroll wheels work on Windows 98 before, but support seems to be patchy (some applications work, some don't).
Windows 98 does support the scroll wheel, but the application also must make use of it.
Whenever an event occurs like the mouse is moved, a mouse button or a key is pressed or released, windows sends a message to the application in focus, informing it what event has occured, and it's up to the application to process the message.
In case of the mouse wheel, it's the message WM_MOUSEWHEEL. The MSDN Library for VC++ 6 for example states that Windows 98 or later is needed (implying that said message wasn't yet implemented in Win95), but if the application had been programmed before WM_MOUSEWHEEL was introduced, then it wouldn't know what to do with it, thus sending WM_MOUSEWHEEL to that application has no effect.
Try the scroll wheel in Windows 98's own applications, like Windows Explorer and the like. That way you can verify if it works in principle.
EDIT: I use an MS IntelliMouse on my Win98 PC and the scroll wheel worked from the beginning.