In Disk Management, right click the left where it says Disk1 and see if there's an option to initialise the hard disk. If so, select it, then you should be able to create partitions.
But before you go further, note that XP cannot format a FAT32 partition larger than 32GB. If you need a FAT32 partition larger than that, use a 98 floppy to restart and use fdisk to create the partition and format it first. XP can work with such a partition, it just can't format it in FAT32.
If you're going to try and keep XP as C, but also want to install 98 to the slave, presumably you're going to use a third party boot manager?