This LinkSys router/hub combos are great instead of a dedicated server to share Internet access. They are a piece of cake to set up and the docs are quite good. They have built-in DHCP, so both Linux and Windows should be able to share access through it.
You may also want to consider getting the version that incorporates wireless, and getting wireless network adapters for each computer that is separated from the hub (to replace the Anypoint). But the wireless adapters are fairly expensive - around $100 per system.
We are not running near the speed of the machines that Father Torque is discussing (we have 1-600 MHZ, 1-350MHZ, and 1-166MHZ). We are also on cable.
We installed a Netgear Router and we are extremely happy with it.
Regardless if 1, 2, or all three computers are on line, there is no perceptible difference in performance.
More importantly, as you pointed out, the installation and setup was quite easy. No need to set up a server system!
Now, if ya want to geek out and want more control, a Linux box with netfilter and some sentries loaded will definatly be the way, but it can become VERY time consuming VERY quick (and at all the wrong times - If your like me, you never stop messing around with the systems ;) )
Currently, I have my DSL piped into eth0 with a netgear FS108 that hangs off eth1 of my Linux firewall. It'a sll cool, but sometimes, I wish I would get off my duff and simply goto CompUSA and buy the damn Linksys broadband switch ("router", if ya want to buy into the hype)..Hell, that way I could make my firewall machine into a dedicated UT server...Yeah..that's the ticket, it'll be the FRFS machine (FreeRepublic Frag Server!)
With regard to Linux - nobody ever got fired for going with Red Hat (I just installed it a couple of weeks ago and it was really a breeze), however I hear that Mandrake is now even superior as far as installation goes.
When installing Red Hat I recommend a Workstation install rather than a server install (at least if you're intending it to be a personal workstation and have dynamically assigned IP addresses (which will be assigned from your wonderful LinkSys router)).
Don't bother with another disk unless you just want more space - partitions are just fine. Allocate 250 Meg for root filesystem space, 200 Meg for '/home' and somewhere between 2-3 times your physical memory for Linux swap space (probably 2x since you've got 500Meg of memory).
And, last but not least, if the Linux partiation is not located at a small enough cylinder number on your disk then you may not be able to boot diretly from it. I ran into this problem with my notebook and found that you can instead have your system start to boot Windows, and add some lines in your Windows startup file (autoexec.bat as I recall) to cause Windows itself to boostrap over to Linux.
Happy Linuxing!