1- Will I need a new dongle?
Not necessarily. You can run Trados 6.5 on a parallel dongle, but you might want to take this opportunity to swap that into a newer USB dongle.
2- What Windows operating system is best supported: XP or 98?
I would definitely go for WinXP - I'm using Win2k myself, having given up on 95/98 long ago.
3- If any hardware is necessary, how long would it take to get properly installed and working?
Not sure what you're thinking of here - the only issue I could think of is RAM: 256MB is about the minimum (I use 1GB myself).
I'm afraid the project is nearly starting and my Trados version only supports RTF-files.
Although it's been some time that I was using T3, it did support more file formats than that...IIRC T3 featured the first version of TagEditor. What file format will you need to be working on?
Best regards, Ralf