Let's make sure we're talking about what's relevant and what isn't, one step at a time.
<hr>Do you know if the XP setup program will go out to other hard drives, see my Windows 98 installation, and try to do something to it?<hr>XP setup will examine ALL hard drives connected to the system. If you opt for a "new install," it will not modify 98 in any way. This is true even if 98 is on the C: drive. What XP (as with all NT based OSs) will do is to modify the boot sector, and copy the existing one to BOOTSECT.DOS. When you start the system, and you see the boot menu, selecting XP will allow the XP boot sector to run to completion. If you select Win98, it will pass control to BOOTSECT.DOS, and Windows 98 will boot as if it were the only OS on the drive. For this reason, I strongly recommend that you allow the dual-boot to happen, unless you have a specific reason, such as testing 98's boot sector and you want a controlled environment, for not doing so.
With any multi-OS configuration, make sure that you install each OS into a separate partition or drive, or you will be asking for trouble.
<hr>mixing NTFS hard drives with FAT32 hard drives in the same system? Can they be mixed?<hr>Yes, they can. 98 cannot see NTFS volumes natively, but you can download an NTFS file system driver for Windows 98 from http://www.sysinternals.com. The free version is a read-only driver, for read/write access you'll need to crack open your piggy bank.
My experience with NTFS in a home situation is that it's not necessary. There are a lot of good things about it, but recovering from an NTFS disaster is painful at best. Unless you need something that NTFS provides (quota management, security, ownership, last-accessed attributes) then it's just adding overhead. Performance-wise, I think most people would be hard pressed to notice a difference between NTFS and FAT32 if they didn't know what file system was in use.