I like VirtualBox. Linux runs like 5 times faster than on Virtual PC (which is optimized for Windows of course). Windows runs great too.
Also 98 is still a POS, nothing has changed in 10 years except nostalgia. Get XP on there, or 2000 if you MUST have something older. Most games will still run.
But oh yeah, games in general aren't going to work if they require hardware acceleration (IE 3D). VMWare and VirtualBox both provide experimental Direct3D acceleration which you can try though (in VirtualBox it's only available for XP and up virtual machines). VirtualBox also provides OpenGL acceleration (for 2000 and up, and Linux). Here is my benchmark of the OpenGL acceleration, though I did it on the first release so it may have improved since then:
http://junk.mzzt.net/results.htm Not too bad considering the alternative. Note that I don't have hardware virtualization which would likely have improved both benchmarks on the guest.
Virtual PC has no graphics acceleration so it's only going to be good for games that don't require it (mostly DOS games or really old Windows games). Of course getting DOS working right is going to be quite difficult, just like old times! DOSBox is a better option even though it's not going to be as fast, for that reason.
The new Virtual PC for Windows 7 might have acceleration, but I doubt it. MS' main customers have always been businesses and so it likely focuses on compatibility with business apps... ie DirectX acceleration wouldn't be a requirement.
As for boot disks, Ubuntu 9.04 is as good a live CD as any. Any tools you need that it doesn't have on the disc you can download and temporarily install into memory to use.