This...
[boot loader]
timeout=5
default=multi(0)disk(0)rdisk(0)partition(1)\WINDOW
S
[operating systems]
multi(0)disk(0)rdisk(0)partition(1)\WINDOWS="Microsoft Windows XP Professional" /fastdetect
Says Windows XP is loading from the first HD....

I believe this...
multi(0)disk(0)rdisk(1)partition(0)\WINDOWS
says that 98 is trying to boot from the second hard drive...
If you pulled out the XP HD then the line should read this...

multi(0)disk(0)rdisk(0)partition(0)\WINDOWS

Because with the XP HD missing this is now the first HD
At least that's what I remember...

Greg