What exactly is it about Win98 that you're unhappy with? Speed? Stability? Look and feel? Ease of modification?
I can tell you that upgrading to XP isn't going to give you a speed boost and may actually degrade performance. XP uses more RAM than 98 even when it's sitting there doing nothing. And there are a LOT more services running under XP because it's a "secure" OS unlike 9X. Even if you turn off many of the unnecessary services, the memory footprint is still larger and there are still more kernel services running in the background.
XP is rock solid compared to Win9X but if you're using this on a cabinet then this should be a moot point. There's not much cause for crashing when the only programs you run are a few emulators and a frontend.
XP has a completely different look and feel than Win9X. If you're looking at a new OS for a cabinet keep in mind that XP is more difficult to modify the startup/shutdown screens than 9X. It's not a simple file rename.
That said, i use XP in my cabinet. Mostly because i had an extra copy and because it's what i'm used to. I have been considering going back to Win98SE though, since it's easier to "hide" Windows on a cabinet when using the 9X operating systems.