I would NEVER recommend installing one OS over-top of another. I would recomend backing up your important files and than formating and installing Win 2K on a clean drive. Reason being that if you installing 2K over-top of 98 the old registry will get imported and some things may not work correctly. Also as a general rule of thumb it's not a bad idea to format and re-install from time to time, and this might be a good time for you.
With that said it would be a good idea to make sure your machine meets the HCL like Tiger suggested (although if your hardware is compatable with Win 98 it is very likely compatable with Win 2K). Again like Tiger said Win 2K will work with either the existing FAT 32 file system, or NTFS. I would recommend NTFS as it is generally better than 98 (less slack, supports more options such as compression and security, etc...).
Good Luck!
-Spy