Up to now in my application, I've been supporting all flavors of Windows from Windows 98 to Windows NT/2000 to XP to Vista.
But because of adding Unicode in my next version, support of Windows 98 would still be possible, but very difficult.
I know there are still some of my users running Windows 98.
What are the pros and cons of me no longer supporting Windows 98?
Dropping support for Win98 opens up a whole host of new Win32 API's that you can use in your software. This will allow you to provide a better experience for the majority of your customers on newer OS's.
Continue to provide the current version of your software for Win98 users, but make it clear that Win98 will not be supported in future versions of your software.
I think most Win98 users are starting to get the message and will be upgrading soon. Also, if they are unwilling to pay for upgrades to their computer/OS, they are unlikely to be willing to pay for upgrades to your software ;)