For a Win 98 computer this isn't bad. I would increase the memory to 128MB. But you will need to find out how much memory the board will support and what type of memory. This can be easily done by going to Gatway's web site and there should be an upgrade selection somewhere. Choose memory and see what it brings up for your system. I wouldn't buy the memory from Gateway. I would go with Kingston or Crucial. You could also go to there web sites and plug in the model number and they should give you the information regarding the memory.
As far as a burner goes, you mentioned it appears there is an extra slot, you could install a new burner and have the CD-ROM installed at the same time. A couple of things to remember, make sure the jumpers on the CD drives are set right. Meaning master - slave or cable select (CS). I belive Gateways generally set everything to cable select. You'll be able to tell by looking at the back of the drive where the jumpers are at.
I wouldn't install XP on this computer. It would be very slow. Right now there is not enough memory to install. Being the board is older, it probably will only support maybe 512MB of RAM. ANd it may not even support that. There is a slight chance there is a BIOS upgrade to support more memory, but be very, very, very careful if you decide to upgrade BIOS. If done wrong or the wrong BIOS update is installed, the computer will no longer function.
The other thing to take into consideration, is Microsoft I belive is stopping support on Win 98 in December. Not many things will be supporting Win 98 after that.
It maybe be better to go with a new computer. It will have the up-to-date hardware and will support XP. It will generally cost you more to build your own, but I find the computer to be much better the the manufactured ones. If cost and time are a big consern, then you should go with a manufactured one. As far as who makes the best, it is hard for me to say, but I would stay away from Compaq, Emachine, HP and even Gateway.
As far as what to get with a newer one, don't worry much about CPU speed. Most of the systems are running over 2GHz. Memory I would make sure there is at least 512MB. I wouldn't put to much into which CPU is installed, AMD or Intel will work just fine for you. The rest of the system just make sure it will meet you needs like having a burner installed or a DVD player/burner.
Hope this helped you out and didn't create more confusion. If you have any other questions post them and I'll reply.