Ged,
ased upon that spec, the machine is more than capable of running XP, so I'd be tempted to suggest that you get a copy and install that - it will certainly be easier than fiddling around for ages with fdisk to get the drive ready for win 98.
Bear in mind too, that microsoft have officially put the nail in win98's coffin as far as support is concerned - microsoft are no longer releasing patches/updates for 98. XP is definitely a better option in your case, both in terms of configuration, support, and ease of use/reliability.
The reason that you are only seeing 2gb on your hard disk is because it is formatted as FAT16, and not FAT32. You can change this, either using FDISK or a third party utility such as Partition Magic (you'll need to be able to create the partition magic boot disks so access to another pc is useful here).
Have a think about whether you prefer the XP or 98 route. If you go for 98 then we'll have a go at taking you through the steps needed to sort things out.