You'll need to set up your partitions before installing anything. You would be better off formatting your partitions later, except for the one that you need to format for the installation.
So, set up your partitions, format one as FAT32, and install 98 to it.
Then, boot from your XP CD and install XP to another partition. Formatting is part of XP setup so do it from there (NTFS). XP setup will automatically detect the presence of 98 and set up a dual-boot menu for you.
After that, format any other partitions you may have from Disk Management within XP. If you want the partitions to be accessible from both 98 and XP, format them as FAT32.