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According to "problemchild" opinion, both can reside in the same partition. But, i think both OSs have 'Program Files' folder get installed by default during OS installation. Both OSs may arrive at a conflicting point though the parent folder i.e, C:\Win98 (called SystemRoot in WinXP) differ.
Theoretically, I suppose it's possible that there may be some problems in Program Files, but I've never had any problems with it. Then again, I haven't used this particular configuration very much. All my multiboot setups use separate partitions, which I always recommend as the better way to go anyway, so it's almost a moot point for me. :D