Having tried to do it both ways I suggest a clean install of both OS's in the following order.
First back up everything including your favorites file.
Then FDISK using a Win98SE Boot Disk from Bootdisk.com
Then use ZAP (or a similar program from your drive mfg.) to zero the first 32 sectors of the drive. Then partition 2 equal sized (FAT32)partitions or more depending on how you want the drive setup (large drives I allow a data storage area for each OS). Label Partition 1 Drive_C, and Partition 2 Drive_D, etc.
Format all partitions normally in FAT32 format.
SYS C:\, then SYS D:\ using the Win98SE SUD in drive A:\
Run Windows 98SE Setup normally on Drive_D:\ to D:\Windows (do not install any drivers or software yet).
Then create a folder via Windows Explorer in Drive_D\: (Win98SE), on Drive_C\: call that folder C:\Windows\Cabs, also create a Utilities Folder on C:\, and copy the file SMARTDRV.EXE from the Windows folder in Win98SE (Drive_D\:to the newly created Utilities folder on C:\.
Then copy the entire Win XP CD to the C:\Windows\Cabs Folder on C:\ (only really need the i386 file but I always copy the whole CD anyway). This will be overwritten anyway, but will be installed from the files on the drive not the CD.
Now restart the computer w/ the Win98SE Startup Disk & the XP CD in the CD drive, at the prompt, type C:\ enter (C:\>)
type CD\C:\Windows\Utilities (C:\Windows)
type CD\Utilities (C:\Utilities)
type SMARTDRV (It will load SmartDrv
to memory and display a blank line, type SMARTDRV (enter), again and it will show you the Smartdrv status.
Cont.