dreamfreak..
my box is an AMD 2400+ with 256MB DDR RAM..
I started with Windows XP but switched to Windows 98. I can truthfully tell you that windows XP is as fast as windows 98, if not faster.
Plus, the noticable stability is like night and day! For example, if you are in the process of upgrading your ROMs on the HD inside the arcade machine, under XP you plug the cable, and off it works (as long as you give it static IP) and you can still do stuff on the machine while it transfers.
Under Windows 98, you will need to reboot to have the network work, and the performance is going to be terrible while you transfer data.
Plus, I like the overall stability of windows.. MAME never hangs the way it did with 98 (on loading some games).
But I highly suggest you install the latest fixes for XP, and try to disable as many services as you don't need to maxize the system performance.