Well, I can shed some light here, but much of what you're asking here can be found on Microsoft's Knowledge base...
First, DOS assigns Win98 drive letters on the primary IDE channel only. (I believe it's primary partition of master (HD1), primary partition of slave (HD2), extended partitions of master, extended partitions of slave). DOS cannot see HDs on the secondary IDE channel, that's why drivers were always necessary back in the DOS-era. (You'll need to find some of those drivers if you want to use Ghost with a drive on the secondary IDE channel). Win98 is responsible for assigning the other drive letters. (I believe you can choose drive letters NOT pre-assigned by DOS/on the primary IDE channel).
To add, Win98 has a 127GB limitation. Microsoft REFUSED to fix this in Win98. (Win2000 and XP gold also had this problem, but M$ fixed it for those OS's). Generally speaking, Win98/ME can see the first 127GB of a drive. Be careful of any partitions that can transcend that boundary--those partitions may look like the full size under Win98--but "drop off" at a specific point--resulting in loss of data! According to Microsoft, some PCI-IDE cards get around this limitation, but I have no idea on how well they work and what risks exist.
So, buying a bigger HD won't accomplish anything--you have to buy ANOTHER HD. Now, if you're concerned with saturating the PCI bus, you might want to buy a PCI-IDE card and use it for your DVD drives. This should work with Win98 and XP (although I'm not sure if the Win98 Emergency Boot Disk will see the DVD drive in that case). If the PCI card gets around the Win98 limitations (BIOS overlay?), then you can put a HD on it.
Before I forget--make sure you have the Win98 fixes to support HDs >64GB before you install anything.
As far as reinstalling XP or Win98--you'll probably have to reinstall XP. I've never been able to use Ghost to get an NTFS partition to work properly on a new hard drive. Win98-FAT32 is a different story. Hell, you could ZIP all the files on your Win98 boot partition, "fdisk /mbr" and "sys c:" and it'll work. My recommendation is to partition the new drive as you choose, install secondary HDs, Ghost 98 onto the primary HD, then install XP.
One other option to consider is USB. I'm not sure but I think it gets around the 127GB limitation in Win98. No PCI bus problem, however expect high data transfer rates...
I wish I could be of more help, but I haven't worked with 98SE in a while...