A. This is due to the fact that 16-bit clients, whether they use ODBC or db-lib, use a 64K buffer for all their control blocks, network buffers etc. You have to keep everything within this one area - there are no workarounds for this.
The main thing that uses up the memory is the space used for "network" buffers - actually these are buffers for the TDS packets, as the actual network buffers may be bigger/smaller and the TDS packets may have to be fragmented by the network driver to get them on the network - but that is transparent to SQL.
The "network packet size" (TDS) can be specified by the client connection. If it is not then it uses the setting on the server that is set by sp_configure.
If you need more connections then the easiest thing to do is reduce the "network packet size" via sp_configure/client connection until you get enough. The lower it is set the more round-trips that SQL client to server has to take, which potentially can degrade performance.