Yes I have just installed xp onto a 40 gig hard drive, (Maxtor). FAT 32, with no problems at all.
The manual with xp says something about only up to 32 gig, and I thought I may have to partition the drive, will have to look into this further, unless someone comes up with the answer.
1 O/S on one drive, and a different one on the other is fine. Not sure about the graphic card, didn't realize that win 98 would not support it.
Usually it is the other way round, when you upgrade to a new and later O/S then that won't give full support to the card. J.