Before making an OS decision, see if you can upgrade your memory. Win95 worked well with 16 MB, at least for me. But if you go to Win98 SE (Second Edition) -- my suggestion -- I'd get at least 64 MB.
Stay away from Win ME and Win XP. Win2000 would be ok, but probably run slowly on 1997 hardware.
Memory is SO cheap now, you can get 256MB for about $40 or less. Also be careful what programs that you load that slow your system down.