Ian is right. As usual.
The main reason(s) why Adobe is referring to Win2K (or XP) are a better memory (RAM) management and a less crash-prone operating system. Don't let these frighten you: I know people who have three different logins on 98, two of them are for the kids who install every game demo they can lay their hands on etc etc and they never have a BlueScreenOfDeath. So it all depends. 98 Can be very stable too.
As for the memory management: 98 takes a percentage of your ram, which means that it takes far too much of your one gig. But that still leaves you with enough ram to go with. One small possible issue is this: 98 doesn't free your ram for new use as efficiently as its newer and bigger brothers. I remember, when I was on 98second, that I had to restart my system from time to time when I was doing a lot of scanning. (This is something macOS9 users also know).
As for the scratch files: windows also uses unused psace on your hard disk to store its temporal data when you are working. As it does this in a chaotic way, Photoshop, which also wants to use this space for its data (no that's mine! no, I tell you: it's MINE! like kids...and some grown-ups), tries to get hold of this storage space too, and this leads to crashes. That's why we separate both scratch files. Best is to give windows98 the default C: and give PS in the best of cases some space on a second hard disk, and if this is not possible, on another partition. For 98 this is rather important due to the awkward way it uses your puter's RAM.
final conclusion: when it works, forget about it. When it doesn't: try to find a cheap solution.