that happens to me sometimes too. win2k and xp don't let you format the drive. when you select it, the option sometimes isn't even there!
here is what i do. make sure you have a ME or 98 recovery disk, not just a startup disk. make a clean one from the add/remove software window (it is the top right). go into fdisk, and delete any partitions you have, and create new one, taking up your whole drive (so one partition). then reset, and type in "format c:" at the a prompt. let it format into Fat32. after that, just do a normal install of XP with it booting up from the CD.
this is the only way i have gotten win2k and XP to let me partition when it doesn't let me initially. tedious but it works. i know what you mean though, when it wouldn't let me wipe the drive, i have like three different OS's at the bootup, until i did the above.
deez