One of my 98SE boxes has PII/366MHz, 256MB, and InCD is not slowing it down noticably. To access Nero InfoTool, you may need to eject the disc, call up InfoTool, and then reinsert the disc.
Which InCD version are you running now? You mentioned reverting to 3.37 initially, but then keyboard problems with 3.51.61. I guess it's 3.37, since apparently you saw the final format message which no longer appears in 3.51.61. BTW, 3.37 has the infamous rename bug (just search various forums), so I would advise upgrading to 3.51.61, or going back to 3.31 (both uninstall via Add/Remove Programs cleanly, so there is no danger in switching, but first uninstall the current version before installing another). Note, however, that sometimes 3.51.61 doesn't like discs formatted with earlier versions (especially CD-MRW!), so the discs need to be fully erased via Nero before formatting them again.
If you switched to 3.51.61 and described the formatting of a fresh disc in detail (options, screen output, etc), I could tell you how much it differs from what I see on my 98SE box.
I presume that you eject InCD discs via the InCD icon (I wouldn't try ejecting by pressing your burner's button, although it works sometimes). Do you have Autoinsert Notification on for your burner? This is reported as Autorun on in Nero InfoTool. Some users need to have Autorun off under 98SE to get InCD working, so try to experiment with this setting. What are the other settings for your burner in Device Manager (DMA, etc)?
Before jumping to conclusions, note that my burner has the same firmware, and I'm using cheap media (D-VISION 80min/700MB 10x, Platinum 80min/700MB 4x-12x), InCD 3.51.61 on 98SE with original ASPI, having no problems with CD-MRW.
ASPI 4.60 should work on your Win98 box, and yes, you should stay away from 4.7x.
Since you mentioned heat-related symptoms, are you sure your burner is running cool in your box?
In general, reading results degrade with rising temperatures of readers and media (that's why users report different Scandisc results for consecutive runs).
You may have mismatch between your burner and media (some burners dislike particular media which perform well with other burners). Neither Maxwell nor Memorex are famous for their CD-RW quality (which has nothing to do with their CD-Rs). Many vendors rebadge discs from several manufacturers, and their quality varies a lot. You could check the ATIP-s of your discs with Nero, CD Speed, InfoTool, and Lite-On's Smartburn. I don't know which discs you can buy, but I'd look for better brands, like Verbatim, etc. Does Cendyne recommend any CD-RW media for your burner?
Having 3 bad sectors at the beginning of your disc might have confused InCD, because CD-MRW stores essential information there. Note that you can't blame InCD for these bad sectors, since for CD-MRW, remapping of bad sectors is controlled by your burner's firmware.