<<< The connection is set up as shared on the main pc. >>>
If you mean that you have enabled "Internet Connection Sharing" on a connection in the PC, then you shouldn't have. When you use a router, there is no "host" PC, all computers connect directly to the router (either with a "wired" connection or "wirelessly") and get their Local Area Network connectivity and Internet access via the router. There is no additional *direct* connection between computers.
<<< The Wireless utility on the laptop can see and connect to the router. >>>
Have you actually "Connected" to the wireless network? In other words, have you run the wireless adapter's software, scanned for "Available Wireless Networks", found and highlighted the one that matches your router's SSID (network name) and selected the option to "Connect" to it? Once "Connected", the wireless adapter should get its IP address by DHCP from the router and you should have network and internet access.
There is a difference between the Wireless Network Adapter and Router communicating with a good signal and "Connecting" (as in "logging in") to your Wireless network.
<<< Does anyone know if this is a "known" problem with wireless networking and win98? Especially when trying it between XP and 98? >>>
No, networking 98 and XP is not in itself a problem.