|"Will i be asked for my win98 disc..."|
Yes you will. Have it handy. I think you can use either the 95 or 98 disc, but I would use the 98 disc.
"Because i have 2 HD's will setup partition / format both drives or just one."
Just the drive you want to install to. As a side note, I would install XP on the 80 gig 7200 RPM drive because it's gonna be faster than your 5 gig. It'll be enough to notice.
"If only one, do i need to do anything to the other drive."
Nope you can leave it like it is.