If the BIOS is only reporting 2.5GB, then there seems to be something else wrong and has nothing to do with Win98. Do you have your hard drive jumpered correctly? Sometimes there is a jumper that caps the size of the hard drive.
Also go into the BIOS and make sure that it detects the parameters of the drive correctly. Make sure that it is in LBA mode and not CHS. You should make sure that your BIOS is the latest version.
Once your BIOS is correctly detecting your drive, you should run FDISK and make sure that large hard disk support is active so that drives can be formatted as FAT32 and not FAT16.