MasterC is right on.
I second that you let lilo do all the grunt work at boot.
The best way is there's no best way. :P What I would recommend is you shrink w98, install xp and LASTLY install Linux.
FAT32 being first is the easiest. xp can be NTFS. Linux should better be ext2 for starter.
That's not good practice. Cuz sometime in the future you'll have a 2nd thought about the structure. So create a FAT32 as extended at the last slot. Here's an idea:
20gb HD, maxtor what else?
hda1, 5gb, w98, fat32, primary
hda2, 5gb, xp, ntfs, primary
hda3, 5gb, linux, ext2, primary
hda4, 5gb, d:/temp/my doc, fat32, extended
Save all Linux & Windows files to hda4. This will do the job nicely for most everyone. I've invented a better file management, but it wouldn't be good for everyone.
Keep in mind xp will eat 1gb+ for Windows only. Most Linux distros will require less then 2.5gb, except for Pro & Power Pack editions. Still have room for office suite & games.
Recent distros will identify xp no prob and you just have to rename it to something that makes sense for the boot menu (lilo).