You can not format the drive from within Windows.
You also can not merge the partitions with Windows native tools and
preserve data.
You need a 3rd party application:
http://www.bootitng.com/
http://www.powerquest.com/partitionmagic/

The Windows XP CD is bootable and contains all the tools necessary
to partition and format your drive.  Follow this procedure and allow
Windows XP to partition and format your drive:

NOTE:  It would be best to physically disconnect all your peripheral hardware
             devices, except the monitor, mouse and keyboard, before installing XP.

NOTE:  If you have an internal Zip Drive installed, physically disconnect the
             EIDE and power cable to it before proceeding, otherwise your main
             hard drive may not be assigned the customary C: drive letter.
             After installing Windows XP, you may then reconnect it.

1.    Open your BIOS and set your "CD Drive as the first bootable device".

      ===> Accessing Motherboard BIOS
      ===> http://www.michaelstevenstech.com/bios_manufacturer.htm

2.    Insert your Windows XP CD in the CD Drive and reboot your computer.
3.    You'll see a message to boot to the CD....follow the instructions.
4.    The setup menu will appear and you should elect to delete all the existing
      Windows partitions, then create a new partition, then format the primary
      partition (preferably NTFS) and proceed to install Windows XP.

5.    Clean Install Windows XP
       http://michaelstevenstech.com/cleanxpinstall.html

       [Courtesy of  Michael Stevens, MS-MVP]

6.    ==> Immediately after installing Windows XP, turn on XP's Firewall.
      ==> http://www.microsoft.com/security/protect/

7.    After Windows XP is installed, visit the Windows Update website
       and download the available "Critical Updates".

8.    After installing the critical updates, be sure and visit the support website
      of the manufacturer of the computer to download and install any
      available Windows XP compatible drivers, such as video adapter
      and audio drivers.

9.    If you happen to run into any installation difficulties, use the following resources:

      How to Troubleshoot Windows XP Problems During Installation
      http://support.microsoft.com/default.aspx?scid=kb;EN-US;310064

      Troubleshooting Windows XP Setup
      http://www.kellys-korner-xp.com/xp_setup.htm

      [Courtesy of MS-MVP Kelly Theriot]

Hi
I have just sorted my mates out with exactly the same problem,.
I booted with a win 98 boot disk,went into Fdisk, removed all partitions,
rebooted with 98 boot disk, made 1 partition and formatted, insert windows
XP, take out win 98, re boot with XP only and XP should instal ok, you may
have to change your boot sequence, but if you have it as CD first and floppy
second you should be ok
Dave

Under the old OS' (98/95 and to some extent 2000), you can
create a boot disk.  Either download one from the internet
(try and ask jeeves or similar) or create one on a old 98
machine (control panel, add remove programs, create boot
disk tab).

Ensure along with other files, fdisk, and format.com are
present, if not, search your HDD for it, and copy to disk.

Reboot from disk, and run fdisk to repartition your disk,
then format the individual partitions, and reinstall
XP .... alternatively use disk partition software such as
drivemagic which will probably negate the need for
formating your HD again.