I am not sure, but this is based on some previous experiences and some googling...
1. You can format the partition containing WinXP. If you then restart the computer and insert the Win98 CD, you can reinstall 98 over itself (registry and other programs should be left intact)...
2. According to *www.pcreview.co.uk/forums/thread-611596.php if you boot with Win98 CD and then type sys C:, your MBR will be taken over by Win98 (havent tried this myself). Then, you can format WinXP partition without a problem...
Hope this helps...
Arun
PS: ALWAYS backup your data in case anything goes wrong. Remember Murphy's Law: If anything can possibly go wrong, it always will.... And it only rains on those days that you forgot to bring your umbrella