you will be able to format two different partitions in two different file formats on the same physical hard drive, mulitple partitions are called logical drives, this means one physical drive which can be split into several other drives making windows think you have more then one hard drive installed, the hard drives do not need to have the same file format all the way through even on different partitions, so for example you can partition 100Gig for Win XP on NTFS, and partition the other 100Gig for Windows 98 on FAT32,
i would recommend that you defrag your drive twice and then try and use partition magic to reduce the size of the current partition, and leave however much space you require unpartitiioned for windows 98/98SE.. (make sure the unpartitioned space does not have a partition on it (i.e. not already formatted to like NTFS), you can make sure within Computer Managment, by checking the currenet disk 0, and if it has a black bar above the unpartitioned space you are good to go.. now reboot and use the Fdisk to install Windows 98 on to the unpartitioned space, then you will have the opportunity to fromat that partition to FAT32 .. (you can do this within Computer manager if you know how, this will allow you to just plain install to the new partition on FAT32)..
just a note Windows 98 does not support USB where as Windows 98SE does .. 😉
RichUK