I wish this could have been solved, but I think it's something mucked up in your old 98 settings that the XP installation didn't clean up.
If you decide to go the dual-boot route, make a small primary partition (C:\) and install 98 on it first. Then you can install XP on your other partition (D:\) no problem. The real key to multi-boot configurations is to install the oldest OS first.
Without third party boot-loaders, Win95 or 98 need to be on the primary partition. If you want 98 to 'see' the XP drive, then format that partition in Fat32. Win95 and 98 can't see NTFS.
Whatever you decide to do, good luck and happy computing.