You will need updated drivers for XP. It is pretty much a given that NONE of your Win98 drivers will work with XP. That's the down side.
The upside is that unless you have extremely old hardware, XP will probably recognize it and have the drivers on the CD. To be on the safe side, you might want to collect XP compatible drivers for all your hardware, just in case. The drivers should be available at the hardware manufacturer's websites.
While it is usually best to go with a clean installation (wipe and reformat the hard drive before installation), this is not a requirement. If you do an upgrade installation (vs. a new or clean installation), XP will be loaded in the same folder as Win98 and use your existing Regisrty as a starting point. This will allow XP to recognize the applications you already have installed and allow you to continue to use them. NOTE: Some older versions of utilities such as anti-virus software, disk utilities (like Norton Utilities), and CD -burning software may not work with XP without upgrading them. As part of the installation, XP will search your system for incompatible software and notify you of the results. You may need to uninstall some incompatible software before XP will install correctly.
You should not lose any data as a result of the installation. However, as things can and do go wrong sometimes, it is always a good idea to backup any critical data existing on your hard drive "just in case", before conducting an upgradeof this magnitude.