You will get tired of having 2 operating systems I can guaranty that, and you'll have to do the job again anyway... but.
OK, here we go:
-Win98 Can't read anything on a NTFS partition (unless you had some add-on softwares but there crappy you don't won't to do that)
-You format a partition in Fat or NTFS not the hole HD, unless you only make a 80Gig partition on your new hardrive.
If you absolutely want to dual boot, I suggest you install xp on your 40gig but a different partition than the one with 98. OR you can buy caddies drive and just switch hard drives when you need them.
Other than that, I suggest you backup your old savedgame or data or music, fresh install xp and all the apps on your 40gig and put all your data on the 80gig. That way if windows crashes, you can format your 40gig and not loose your 80gig data.
Hope that help!