XP will not perform very fast with that amount of Ram, it would be good if you can add some more memory. Looking at the specifications it can use up to 1GB od RAM. But I suppose it does support Win2000.
Are you networked, if you are you can map a CD drive and use it for the instructions below.
Remove all of the installed Programs from Win98 and clear the Temp files to free up as much space as you can. When it is clean Defragment the Drive.
You will need to copy the I386 folder from your XP CD to the USB drive/stick and then paste it onto the Notebook drive.
Navigate to the I386 folder and double click winnt32.exe and follow the prompts. Leave the Partition as Fat32 as it can be converted later on when you remove all reference to Win98.
You may as well copy the Motherboard Device Drivers to the USB Stick at the same time as you are going to need them, also copy your Antivirus Sofware that you are going to install.