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This was the case with regular Win98, but was fixed with Win98SE
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That's what I also thought originally. But I had 98SE on my machine with 256MB RAM when I first got it. Then I upgraded to 640MB, and there was no difference in how my games ran. Then I bought XP, and suddenly everything ran smoother.
Keep in mind that XP uses up over 200MB of RAM just to keep its own processes running.