1) Look in a search engine ( www.yahoo.com or any search engine site) for "sharing modem" and you'll get several hits on sharing a internet connection. -- They all require software setup and your Win98SE has the software called Internet Connection Sharing. Read up on it. If you are the same person who posted an earlier question on how to (hardware-wise) share a modem on one computer and have the second computer access and use that modem -- you need the software that will let you do it. You cannot tell one computer to use the modem on another computer without the software directing it and telling the machine to ignor its own hardware and use the other machine's hardware as a gateway to the outside world.
2) Your second issue is not clear. I understand the above to mean that the hardware meets or exceeds the minimum specs for Win2000/WinXP, but the fact that a clean install works but not an "upgrade" --- it's not clear why from the above. ---- Do you have enough "free" storage space to accommodate an "upgrade" versus a "clean install"? Are you going form 98 --> xp or 2000 --> XP?
Post comments to your above question and I'll add to my response later.