oh man! a 350 MHz PC running ME is your router? that s the worst option. let me just say that while windows is just no good at that sort of thing, any version of windows running the NT kernel (NT, 2000, XP) is a much much better option. it has better multitasking, and just a lot of low level features that are pretty much required for this kind of thing. anything running the windows 3.1 kernel (3.1, 95, 98, ME) is the worst choice.
with that said, the answer is no. the hardware router will not allow you to do things that the windows internet connection sharing would not (with the possible exception of appletalk sharing). the hardware router will just work a lot better. windows ME will crash, and then the rest of your network has no connection. you give your dell to your sister, the rest of the network has no connection. hardware routers are cheap enough that there is no excuse not to have one.
but in theory, you can do file sharing with just a hub. combined with windows internet connection sharing, this will allow you to connect as many machines as you want (again, i do not recommend this!!!) the hardware router does not give you more functionality, it just takes the load of your frail windows box. it is probably more configurable, but you might not need too much of that. it seems that you are looking more for ease of use than configurability.
two more points:
what i said before about it always being easier to do something on a mac.... well here is a very important exception. this internet connection sharing thing, can be done on the mac too. in fact the BSD sublayer of OSX is generally regarded as a much superior platform to do this kind of routing on. this would require a second network card for the mac*, so it s probably not worth it to you. and i don t know if this Phoneline networking whatever program you use is mac compatible. i just wanted to mention the fact that it is there. my point is, to set up this internet connection sharing complete with routing and NAT, with windows basically requires a right click. with OSX it requires extensive command line configuration. it is more powerful and more reliable and more configurable, but much harder to use, for sure**. maybe one day apple will integrate this into the GUI. that would be cool.
* I believe it is possible to router with only one network interface. i really don t approve of that option though. it gives me the creeps actually.
** there is a very nice third party GUI front end to these command line options. again, this is all FYI. i am not recommending any of this for you. what you want is a hardware router (wired or wireless when you got bucks)
and the second point: to answer your question, yes, you can use that old dell as a file server. stick it up in the attic and turn on windows file sharing, and then use the OSX SMB client. infos on that are everywehre on this board. i have not been too happy with OSX s SMB client. i think it is a little flaky, but it is very nice to have that option. there are also third party solutions for both the mac and pc platform, macpclan, dave, sharity, etc. my recommendation here though, if you think you are willing to set sail from the microsoft empire would be to install linux of freeBSD on that pc. it is a much better platform for a network server than windows ME. perish the thought. you can serve files over SMB with samba, nfs, AFP with netatalk, or just plain old ftp. all these combos work, i assure you. nfs might be the easiest server to set up, and on OSX i think AFP is the easiest client to use, since it has that browsable interface.
yes, network administration seems confusing and daunting at first. but we re here to help!