Unfortunately external drives are tough for command-line access, which is what you need to format into FAT32 - Win98 ystems (and all DOS-based systems) . XP by default formats drives as NTFS, if the partition size is bigger than 14 GB (or something).
I'm not really sure discwizard will be able to see your drive through the interface. I know Norton Ghost cannot see USB drives, even with drivers loaded. But it is worth a try.
Short of taking it onto a Win98 system and loading up drivers, and then formatting it, I don't know of any other way. The other would be to physically remove the drive form the casing, plug it in as a regular IDE drive and then use Fdisk/format off the win98 floppy and get going.