well i dont know about needing 256mb of ram to run Windows 2000, i got by on a computer is 128mb of ram and a 1.2ghz celeron for about a whole year!
Games wont run much slower, its not going to be hard finding windows 2000 drivers for all his hardware, i mean most drivers at for both windows 2000/xp.
i would never stick with windows 98, i mean microsoft does not even support it anymore, and god knows how awfull it must be.
With Windows 2000, you should be able to do almost as much as windows XP, i mean all Windows XP is is a bloated version of windows 2000 with some hotfixes and different icons and themes etc... and some extra tools and maybe some software improvement, but nothing thats going to stop applications from working.
Herb22 whats your pc specs?