DO NOT EVER EVER EVER INSTALL XP OVER WIN98 OR ANY OTHER OS WITHOUT DOING A FULL FORMAT FIRST!
Theres a long list of reasons why this will screw your pc up and slow it down! Ill be here forever if i describe them all. The best thing to do is load the XP cd and then use the formatting wizard on the disk. It will then autoformat your drive and also change the partitioning to ntfs.
Barry- your pc will run XP but it wont run it too well as really XP needs 150+mb always free to work, as you have less than 512 in the machine to start with this will hinder it. Do you know what ram it is? (ie

c2300) as i have lots of spare sticks so can send you some!
As for the mem stick:
Its definatly a conflict, it seems that the network drivers they are using for it clash with the DCHP drivers that SE oftern uses. Try these steps below and then try reinstalling the stick:
Click Start, point to Settings, click Control Panel, and then double-click Add/Remove Programs. On the Install/Uninstall tab, remove any program providing a DHCP service by clicking the program, and then clicking Add/Remove. On the Windows Setup tab, double-click Internet Tools, and then click to clear the Internet Connection Sharing check box. Click OK, and then click Yes when you are prompted to restart the computer.
If your still having problems after this then its going to get pretty complicated to fix and its then up to you as to weather we push on or you just install XP...
EDIT___ Guys- do you reccon the standalone USB disk drivers (ie:sony DSC) will work if he flashs the key?