"Does this problem relates to Icon Packager or does this problem lies on Windows 98?"
The most likely person to answer your question is YOU. Disable the program (if possible) and see what happens. Uninstall it and see what happens. Report your findings.
On the sight of it, it could be a resources problem. Run RSRCMTR.EXE (the Resource Monitor) to see if these are scarce.
Hope this helps.
Please refer to this image:
Why is it that my icon colors are disturbed? My desktop icons such as My Computer, Network Neighbourhood and such are alright.
For your information, I do have Stardock Icon Packager installed and running on my computer right now. Does this problem relates to Icon Packager or does this problem lies on Windows 98?