Your friend's right, take out the xp disk, install 98 on the other disk. Then put xp in as the master and edit the xp boot.ini like this...
[boot loader]
timeout=5
default=multi(0)disk(0)rdisk(0)partition(1)\WINDOWS
[operating systems]
multi(0)disk(0)rdisk(0)partition(1)\WINDOWS="Microsoft Windows XP Professional" /fastdetect
D:\="Windows 98"
I'm not 100% sure that 98 will boot from d:\ though. If your existing boot.ini is different to first few lines leave it like it is - all you're doing is adding the D:\"Windows 98"
EDIT: Hang on, I just tried it with an old windows95(!) disk and it said it couldn't find hal.dll, I'll investigate further...