One thing I noted in the review done on this site regarding the best OS for gaming is that Win98SE was not even compared.
98SE performance-wise is the best OS for gaming on a single-CPU system, period. ME has too much junk, 2K and XP have too much overhead (they are, after all, workstation/server operating systems, fully multitasking and multithreaded, with a lot of extra things running in the background).
If you run a dual processor system, you can run your game on one CPU and everything else on the other, and then XP is a beaut.
A little work configuring your 98SE system will go a long way as well, for instance cut out as much of the junk you don't need as possible.
If you run ICQ, Kazaa, or anything like that, configure them to never load until you explicitly call for them, so they don't tie up CPU cycles and RAM.
Antivirus is a necessary evil and should be on every system. My personal preference is Symantec Norton Antivirus, but any good package will do.
A good firewall is also a must if you care about your system's security, and your best bet for performance is a hardware solution, either a computer dedicated to providing your home network with internet service or a router will serve equally well. If you can spare the CPU/RAM overhead any of the popular software firewalls will do, for example ZoneAlarm, BlackICE Defender, or Norton's.
If you intend on upgrading to more than 512MB RAM, you don't have much choice, because there is a problem with a good number of games, Win98SE, and more than 512MB. In such a case, your best bet is XP, if you want to take advantage of all that memory in games, and what else uses so much RAM on a home computer?
Paul
I am me, me I am, I've never had green eggs and ham