Connecting direct without a firewall, or firewall software will be a plan for disaster.
A router between the modem and the W98 PC will help a lot.
Running it as server just changes the way it allocates resources to things like screen rendering vs disc access.
Alternativly you could also probably upgrade the OS to NT4 without too much difficulty or cost (if you were to do it legitimately), have a better file system, more stable machine etc.
I have (had) NT4 running on a Celeron 333 with 96MB of RAM, works fine, though slow to startup, but it is (was) never switched off.