I have 98SE on a laptop and the windows folder is about 1Gb but in there are all the temo files, you may also have some recovery files in there as well as programme files. It all depends on how you machine is set up. All the clever backgrounds and samples take up quite a lot of space, you can have a look at what is installed and see about cleaning it out.
If you go to the add and remove programmes and see the Windows setup tab, in there it will show you a lot of the installed components and what space they are taking up - I have taken a lot out but it still takes up 14MB with the installed components I have left.
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