Of course it is by far the easiest to do this at the gateway - as this is the point all traffic will go through.
But if this is not possible, look at using a policy editor for your XP and 98 systems. If you have a windows 2000/3 DC you can enforce it from here for your XP systems. For the 98 one's you will have to just edit the registry directly. Look on the resource kit or MS web site for the policy editors.
In the registry - change the default gateway to that PC's IP. This way they will only be able to access local traffic. And since it is a policy the users will not be able to easily get around this without really hacking the system (which in most companies is a tad frowned upon).
There you go - a software based solution that works.
Zaf