It's been so long since I've had 98SE running that I probably forgot more than I ever knew and only remember things I never heard of. I'm not even sure I still have a good book on it around.
An archive folder has notes that I may have posted somewhere in a previous thread - or may never have gotten around to posting.
The only one that really looks like it might be applicable is #4, which notes that the SCANDISK utility in Win98 can't process a disk larger than 127 GB. Vague recollection is that the SCANDISK utility is invoked for the "analysis" performed as the first step in a defrag. If the disk exceeds what the first step can handle, or if the free space is "misread" in that step, you quite likely would get an out-of-memory error message of one flavor or another.
The article may NOT actually be applicable, since there were a couple of early evolutions of Win98 that might have "fixed" the limitation.(Win98, Win98SE, Win98SE-SR1, and WinME in different flavors actually did have some differences.) I know that I tried to dope out what should work and what wouldn't a couple of years ago, but it's either too long ago for the tired brain or my coffee isn't perking me right.
#6 on the list might also contribute something to the confusion, but although it indicates a recent "verified for accuracy" it doesn't seem to include what would likely be surviving Win98 versions.
I'll go ahead and give you the whole baggage cart of articles, but I think all but the fourth one - Limitations of FAT32 - probably are just extra clutter.
If you are past the "drive size" limit of what your version of Win98SE can handle, the only thing realistic to do about it is to partition the drive, I would think. If that looks necessary, I'd be inclined to see if the HD manufacturer has a Format/Partition utility you can download rather than attempting to figure out what's right from what Microsoft lets you find on old systems now.
1. Description of the FAT32 File System (KB article 154997) gives a brief description of FAT32 specific to Win95 and other obsolete systems. This is a very old article, and may not be up to date even for the latest Win98 versions.
2. The above has a link to Overview of FAT, HPFS, and NTFS File Systems (KB article 100108) is a little more comprehensive, but still a bit dated. (It also includes information on the now obsolete HPFS format that was used by a few obsolete NT systems.)
4. Also in the same bucket of interlinking articles, Limitations of FAT32 File System (KB No 184006) may give you information on what's appropriate for your specific Win98 versions. There are some critical limitations on what various apparently identical versions can do, and in some cases there are limitations due to your BIOS (for which you may be able to download an upgrade if necessary).
6. For obsessively curious historians, MS-DOS Partitioning Summary gives a "history" of the evolution of the FAT system, ending with the introduction of FAT32 with Windows 95.
(OK, I did omit a couple that were in the archive, but they dealt only with the HPFS format that no sane person I knew ever used much.)