Version 2.0 without any Service Pack is the last version with support for Windows 98 and Windows Me. Version 2.0 with Service Pack 2 is the last version with official support for Windows 2000 although there have been some unofficial workarounds published online to use a subset of the functionality from Version 3.5 in Windows 2000. Version 2.0 with Service Pack 2 requires Windows 2000 with SP4 plus KB835732 or KB891861 update, Windows XP with SP2 or later and Windows Installer 3.1 (KB893803-v2)
Win98 only supports a limited set of the classes of .NET2.0, and only without service-packs. Your development-machine doesn't change that. And yes, when you run into a problem using ancient software, support is virtually non-existing.