I really don't know what else will help besides a clean installation of XP. If you do have the upgrade CD, here's a link to a thread that gives instructions how to perform a clean install without installing 98 first:
Yeh, I have an upgrade CD. I saw the option of doing a fresh install when doing the upgrade and thought about it, but wanted to keep the backup OS incase I wanted to revert back. I take it that if I do the fresh install of XP, it will clear out 98se?
Yeah, my suggestion is to format the drive and start over. I would say the 'backup' os feature you wanted isn't really working out. If you want to dual-boot, that's a whole other thing... and it's easy too.
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.