I can go out and purchase a new hard drive, compatible with my old PC's hardware (ie. recognized by it, and how would one determine this?) to have "at the ready" to install in my '98 machine when or if the present one fails, and the restoration of the image would be fairly straightforward. (A little side-question: would I need to install my original CD Win98 OS on that new HD before restoring?)
This option should work fine. You should not need your original Win98 CD for the restore. If you post your system hardware specs, we can determine what hard drive(s) will work in your system. If you are going to do this, the time to test restoration of your Drive Image backup is before you actually need it.


Another option would be to do as I originally suggested, restore the image to a new FAT32 partition on my XP laptop but I would install the WIN98 OS after restoring the image, in order to install the correct drivers? This rather confuses me a) because I thought that Windows XP had already the drivers for most hardware and b) why would not installing the '98 OS on a new partition before restoring the image install the needed drivers? and c) I thought that installing an OS on a drive or drive partition would format and wipe out everything on it.
I am assuming that you would want to dual boot Windows XP and Windows 98 on the laptop after restoring the copy of Win98 to a new partition on the laptop. If you don't want to do this, and just want to access the files, then that solution will work fine. If you do want to be able to boot to Windows 98, then you will have to do an over-the-top reinstall of Windows 98. The XP drivers on your XP installation will not work for Windows 98, and the existing driers form your other installation will not be correct for the laptop. Also, when you perform an over-thetop reinstall, it will wipe out the boot information for Windows XP so that only Windows 98 will boot. This can be corrected, but it is a pain.

Would an alternative be to purchase a new "backup" computer, reformat its harddrive, install the Win'98 OS, and "restore" the old '98 image to it? Or am I then again entering the murky ground of hardware compatibility?
This is an alternative, but you will need to make sure that any new PC will work with Win98. Windows 98 drivers, including those for motherboard resources, may not be available for some of the newer hardware. You will need to check compatibility before purchasing. You can use a utility like Belarc or Everest to determine your current PC's hardware specs and post them here. We can then tell you if an upgrade or a new PC would be the way to go.