you can use 1 GB I have done it, it seems that with more than a gig ME or 98 gets impossible. Without doing this, you will get low memory errors. You should be fine as long as you add a line in the system.ini file under [vcache] to limit the virtual memory to 512MB so it looks like:
Well it shouldn't, as I'm running a dual boot win98se/xphome with 512mb ram. The problem you would have is that it takes a long time to boot in win98 (real long time), but when it first loads you wont have a problem. If I remember, I'll time it next time instead of making coffee etc.
I have found that there are many good freeware programs on the net as long as you are willing to look for them and try them out. I just upgraded my computer (again), and installed 1 gb of ddr memory fully knowing that win98 would play up, it did exactly that. I than found this great little program, XMSDSK. Now win98 has 256 mb ram and a ramdisk of 750 mb, and xphome is happy as none of these changes affect it.