Windows 9x is actually VERY much less likely to be compromised than XP,
which has innumerable security flaws. I still use it for general Internet
access for that very reason. (Would use Linux but it doesn't support the
hardware too well)

The main security risk in 98 is the Outlook/Internet Explorer combination.
Avoid those programs and you're unlikely to get hit by anything nasty. Same
cannot be said of XP, which has vulnerabilites whereby ports which are
exposed to the Internet can be directly attacked. DCOM/RPC for example -and
these are always a risk whatever software you run.

In terms of ISPs, the main issue is probably that their helpdesk staff want
to concentrate on a single OS to make their life simpler. That's probably the
real reason.

Whether this makes any real difference is very doubtful. Provided your modem
still works with 98, then that is all that matters really. If it doesn't
then a router and network card may be a cheaper alternative to a new PC, as
they are largely OS-independent.