I have potato on a 486SX, 25MHz, 300MB hard drive, 8MB RAM. It tends to drag because it swaps a lot, but otherwise is fully functional. I had it masquerading the dial-up connection with no problems. The reason I don't have it masquerading the DSL connection is I don't want to buy a second ISA NIC. (I actually have a spare USB NIC, but no USB for ISA-based machines)
If your DSL is anything like mine, you don't have to. I have all my machines and my modem on the same hub, and use pptp to connect my ancient 486 laptop to the 'net, and then use masquerading, all over the same local network. I have no idea if this works with pppoe, since that's not how my adsl system is supposed to work.
Matijs.