Hi all. I'm building a PC for my kids for X-mas."
Kids.. yeah, right

"I tried to load WinXP on the HD, but it keeps giving me error codes. So now it's like 1/2 installed but not worth a chit."
Any error code while installing an OS on a new HDD usually means the HDD is defective. Of course, I am asuming that you did FDISK, erased all partitions, created a primary partition and set it to ACTIVE, then formatted the HDD.
"I really just want to remove it and install 98SE instead. The trouble is I can't boot off a 98 startup disk, and the WinXP startup floppy I have boots the machine into WinME?"
Make sure your BOOT sequence in bios is : CD-ROM - Floppy - Hard Disk.
"Once in ME I have no idea how to reformat the drive so I can start over. The normal 'format c:' and 'fdisk.exe' commands don't work. Anyone got any ideas?"
Yes. Throw ME into the trash. Now. Before it destroys you.
Make sure of your boot sequence in BIOS, then make sure you format that hard disk. Try to install XP again. If you get the same errors, its the Hard disk that's kapput. Also, check to see if the HDD is making "click" sounds, if it is, return it and get a new one.
If your new PC is 1ghz or more, be sure the HDD is 7200 RPM, otherwise you screwing your system speed.