I've tried three apps and they all have problems.

ICE Encrypt and Remora USB Disk Guard run ok with 98SE, but they
completely failed to encrypt files and folders.

Cypherix LE seemed perfect. During the install it selects your operating
system from a menu and installs the correct files on a USB flash drive.
Cypherix creates an encrypted container or "vault" for any files or folders.

When I attempted to run Cypherix I got an illegal operations box. I usually
avoid any app that causes an illegal operation, unless the app is irreplaceable,
which is usually not the case. If someone knows what's causing the illegal
operations problem please let me know.

With 98SE, I only need to protect folders that are loaded onto flash drives,
because they are used with other operating systems. A protected folder
that won't open without a password, similar to a WinRAR encrypted archive
is really all I need. Simple is better.

You may be better off with a flash drive (or more) that sports a hardware write protection switch. Unfortunately such thing may be hard to find nowadays. I do have an old 2GB flash drive with such switch and it's most useful when working with possibly infected machines.

Some drives may be available - please check this list.

I also found this small application but haven't tested it: USB Write Protect 2.0. It says XP and later but only appears to depend on VB6 runtime so it may work in 9x too.