Ok, as far as I know, unless you are using an upgrade 98 cd to upgrade from 95 or 98 you have to install 98 to a bootable partition, if you just formatted it without the command C: /s then the 98 cd cant install to it.
I came into PCs too late to be involved in pure DOS setups but as I said before in agreement with you, 2 gig is the max size for FAT 16.
If you run Fdisk again what does that show your partitions as ?
If it still shows them as you set them up initially I would just do Format C: /S at the A: prompt and then do a clean install of 98 to that partition.
If somehow the partitions are showing differently then, unless someone has a better idea, I think you will have to delete and recreate your partitions and format again