When you boot up from the OS install disc, you will have the option to reformat your partitions (C drive, D drive, etc.) If the OS install is an upgrade there might be more specific rules, but I only do fresh full-installs of OS. Make sure you have the ability to find or install an ethernet driver for your system before you do it or else you'll be left with a computer that doesn't detect internet (Unless the OS gives you these drivers compatible for your system.)
Unless you plan to dual-boot (Run two operating systems i.e Linux and XP/Vista/etc.) I recommend re-formatting the partitions so you have maximized Hard drive space. No need in keeping Win98 on your computer if you're installing XP, but of course, if you want, you can.
Purely choice.