Just set up a dual boot. The OS doesn't hard code your hardware settings, so if XP has some problems and the IRQ's don't seem to work right off or something doesn't work the way you need it to, you can fall back to 98 and it'll work exactly as it did before, and you can work on getting XP working properly if possible. (A second partition or hard drive for the XP install would be preferred, with all your apps reinstalled specificly for XP, but installing to a different directory on the same partition will work.)
One thing you may have issues with, XP does not support non-plug-n-play ISA cards. You may need a new SCSI card for your scanner.
Another issue is the drivers for the TV Wonder for XP aren't that great. There's one issue where the TV viewing is corrupt in some configurations (it looks sort of like an un-descrambled cable channel, but worse), and to fix it you have to change your desktop color depth from 32bit to 16bit and then back (or vice versa) to correct it, every time you run the TV app. Or update your display drivers according to ATI, but since I am running the newest drivers, that obviously doesn't always work.
Your applications may also limit whether you'll want to upgrade. Not everything is compatible with XP, even stuff that works in 2k may not work in XP (more due to the makers not wanting to patch them than there actually being major differences in the two).
XP is a tad faster for me, and so far less crash-prone. (My 98SE install was reasonably stable, I didn't generally crash unless I was actively doing something with a high chance of crashing it, and usually it just caused explorer.exe to restart. I have similar problems with 2k doing that at work, where I installed and configured it on my workstation myself. So far though I don't think I've managed to make XP actually crash, though I have had minor bugs which were most likely due to application bugs, not XP itself.) I haven't yet tried gaming.
If you do decide to use XP, do NOT do an upgrade. Do a clean install, whether you wipe the system and start fresh or do a dual-boot install. Upgrading Windows OSes always seems to work, but it leaves cruft behind that in the end does make it less stable.
I have to wonder how legal this copy you bought from your friend is. What division does he work at that allows him to take copies of XP home and sell it to his friends for less than retail? And can I get one?
As to the fast-user-switching, how many people really use that so far? Unless you have multiple people using the machine, just turn it off. (For some reason I couldn't find any way to LOCK my machine until I disabled fast user switching and made it so I have to enter a password to log on, which wasn't available with the "pretty" logon screen.) As for the eye-candy, if you disable all of it, the OS is faster than 98SE. Obviously if you leave it turned on, it's going to slow the system down, that's why the requirements are so high. The eye-candy isn't why I decided to start using XP.
Keep in mind also that 98SE will be completely unsupported very soon. Meaning no security updates. (If you're using IE6 MS may make it still possible to update security issues in that, but I wouldn't be surprised if they make it so that anyone running 98SE can't install any new security updates, meaning if you try to use WindowsUpdate or to download a patch by itself.)
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