Even with an update disk you can format first then install XP and it will ask to "see" your W98 CD to prove your entitlement. Alternatively the XP setup can format the drive then install.
The conventional wisdom on this forum is to wipe everything and start from scratch to get rid of any dross. However, personally I've upgraded from 98 to ME and then to XP and my XP works perfectly (but the less said about ME the better!).