Null passwords is a setting in your smb.conf . Do you have the Win98 boxes setup to login to an NT domain (box checked for "Log on to Windows NT Domain" under the "Client for Microsoft Networks" on the Win98 boxes?
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It can also authenticate users that exist in database if the password entered is correct or not.
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(users that doesn't exist in smbpasswd)
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Are you actually storing username/passwords in an SQL database backend or are you using smbpasswd for authentication?
It sounds to me like your not actually authenticating those Win98 boxes to the PDC, but I'd like to reserve judgement until I am actually sure. Also can you post your smb.conf?