Actually, considering the specs, Win 98 would be fine - I have my daughters pc I setup that is a PII 400 running Windows ME, and that takes more horsepower, but runs just fine. I would say that if you need USB support, go with Windows 98.
I have even setup Pentium 200 machines (not even a PII) with windows 98 and they're great for basic stuff. I would go with Windows, you will have way more options with hardware and front ends.