Before you kill the XP, download a 98 boot floppy file and also find debug.exe. You can do all this through Google.
Get your hands on a floppy whose contents can be erased. Format it first to find out if it has bad spots. When you get a "clean" floppy, create the boot disk from the downloaded file (just double-click it); then copy debug.exe to it.
More questions:
1. What's the size of the hard drive?
2. Do you want to duel boot both OS's? Or, kill XP and have 98 only?
3. What's your particular reason not to keep XP for your grandparents?
4. Exactly what flavor is the 98cd? Original or SE? (If it's the Upgrade to SE version, it won't recognize XP as the requirement to proceed with the install. It will be looking for 98. If it's original 98, it'll be looking for 95) Does it have the product key?
5. Can you get your hands on a 95 cd from an acquaintance?
6. How much memory do you have?
7. How will you access the web?
Get back to me with those answers, and we'll go from there.