AFAIR you can use an XP upgrade CD to do a clean install. The installation process will have a step requiring the insertion of the qualifying OS CD (Win 98 in your case) so that M$ can verify your upgrade rights.
I'm pretty sure that a pukka XP Upgrade disk is bootable (I have done this a couple of times for friends and relations).
A win 98 CD may fail to format a disk if the partition is too large, or is already partitioned and formatted with a file system that it cannot recognise (e.g. NTFS, UNIX etc.).
SD