Many a time a box has had to be set up to dual boot Win98/WinXP because of compatability issues or DOS issues. whatever..

But I can respect as to why the need/desire to remove WinXp.
Issues I see are driver related only outside that for a "dedicated" purpose no great problem.
you may have an issue with Fdisk on the 98 disk.. it may have a problem with removing the NTFS formatted partitions (assuming they are NTFS formatted) you may need do the partinoning with the XP CD to allow the Win98 install to recognise the partition..

go for it.. knock yourself out with te install

cheers