I'll assume that the colors weren't messed up before.
If the colors are "grainy", it could be that your video settings have gone back to a 256 color default. Try right-clicking the desktop, clicking "Properties" in the menu, and checking out the "Settings" tab. Adjust the color quality to the highest it can go (all the way to the right). While you're at it, you might want to see if you prefer a higher resolution ("Screen Resolution" setting in the same tab).
Otherwise, something might be wrong with the video card's color correction settings. Can't remember where you can change this in Win98, but probably in roughly the same place as the above adjustment.
If the colors are just plain nasty, like they're washed out or like there's a filter over the screen, another possibility is your monitor. If you use an LCD monitor, the first thing you should do is press the "Autotune" button. It might be somewhere in a menu. You can also adjust various things like sharpness and color temperature. I've seen way too many LCD's at suboptimal settings-- if it hurts to look at, you ought to change the settings.