|"Can't i use Windows 2000 or Windows XP?"|
With only 128MB RAM, it would be unbearable. If you insist on Windows rather than Linux, Win98SE or WinME are probably your best options. They can be tweaked with 98Lite to remove some of the features such as Active Desktop & Web integration that slow them down. 98Lite is free unless you want to go with the "Micro" installation. For you, I suggest the "Chubby" installation:
There has also been some discussion about a program called KernelEx that will allow some newer apps (such as Opera 11) to run on Win98. Being able to run a modern internet browser is fairly important. The latest version officially supported by Win9x is IE6 & IE6 support is being dropped from many websites. I haven't tried KernelEx yet, but I plan on giving it a try as soon as I can throw together an older box to play around with. The latest version just went final today!