Andy -
You aren't talking about an easy task

.
To format a computer is gonna take awhile, I'll get ya started and, if I have time, help with the rest. If not, other members wil pick up where I leave off I'm sure.
Before I begin, there are a few things to concider. Do you have all of the drivers - modem, nic, soundcard, video, chipset, etc.? If not, download them first.
Another thing to point out. Once you format, all is gone. You won't be able to just to put 98SE back on. You would have to do the same as installing XP listed below (substituting 98 for XP).
Finally, the XP install disk you are refering to better not be installed on another pc. If you didn't buy it specifically for this endevor, stop right here. If you have the original 98 install disk, my suggestion would be to reinstall 98 instead of XP.
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First, backup all your data. Some things over looked in backing up are the Favorites folder, OE store folder, blocked senders list, ect.
In Win98, make a boot disk (Settings - Control Panel - Add / Remove Programs, Startup Disk). Or head over to
www.bootdisk.com and grab one there. When done, leave the floppy in the drive and reboot.
When it boots to the floppy and you are at the A prompt, type in "format c:\" (without the quotes), hit enter, hit "y" (again, without the quotes) when prompted.
After the drive is formatted, you will be prompted to label the volume (I just hit enter).
Remove the floppy and place the XP install disk in the CD drive. Do a ctrl-alt-delete to reboot to the XP disk. Hit a key on the keyboard if prompted to boot from the CD.
Follow the instructions though the installation of XP. When you get to the point of what partition to install it on and prompted to format as NTFS, I suggest to choose NTFS.
That should get you started

. Remember, if you do format - all is lost. There are ways to recover data but not in the realm of this thread to cover (at the moment).
Good luck!
Mike