my first idea...virtual memory. check "pagefile.sys", after enabling view of system and hidden files from the folder options. see how large that file is.
Win 98 don't have Pagefile.sys .. it does have a swap file win386.swp .. sizes between 35 and 120Mb are normal.. unles you have moved it (registry hack) it should be in the C:\windows folder..

For a clean OEm install of Win98 you are looking at 120 to 300Mb of hdd.. throw in office 2k and you can still fit the whole lot onto a CD and have realestate to spare.. As for Win XPensive a normal install is around 2Gb

More Questions..

..Are your "Program Files" and "My Documents" on the same partition as Windows..
..What Software are you running..

Some Imaging progs will chew massses of the swp file, but this should settle after a restart ..

oh yeh.. talking about restarts.. had any scandisk activity starting up lately? chech your c:\ for chk files.. have seen hundreds in there (mind win98/dos spits a dummy when the root folder reaches 512 files)

Note in my replies I am mentioning the whole of the windoze install not just the windows folder.... which are you talking about.. and most of my comments refer to Win98se

Cheers