From what I can find out a compressed disk is a file thats created on it where data is stored.
This should have been removed when you formatted it.
As Simon suggested try using Fdisk and deleting any partions.
Then you need to create a primary dos partition.
Choose enable large disk support and use FAT 32 and say that you want all of the space on the hard disk to be assigned to drive C as described below.
How to Partition the Hard Disk
After you decide which file system you want to use, run the Fdisk tool:
Insert the Windows 98 Startup disk in the floppy disk drive, and then restart your computer.
When the Microsoft Windows 98 Startup menu is displayed, choose the Start computer without CD-ROM support option, and then press ENTER.
At a command prompt, type fdisk, and then press ENTER.
If the hard disk is larger than 512 MB, you receive the following prompt:
Your computer has a disk larger than 512 MB. This version of Windows includes improved support for large disks, resulting in more efficient use of disk space on large drives, and allowing disks over 2 GB to be formatted as a single drive.
IMPORTANT: If you enable large disk support and create any new drives on this disk, you will not be able to access the new drive(s) using other operating systems, including some versions of Windows 95 and Windows NT, as well as earlier versions of Windows and MS-DOS. In addition, disk utilities that were not designated explicitly for the FAT32 file system will not be able to work with this disk. If you need to access this disk with other operating systems or older disk utilities, do no enable large drive support.
Do you wish to enable large disk support (Y/N)?
If you want to use the FAT32 file system, press Y, and then press ENTER. If you want to use the FAT16 file system, press N, and then press ENTER.
After you press ENTER, the Fdisk Options menu is displayed. Press 1 to select the Create DOS partition or Logical DOS Drive option, and then press ENTER.
Press 1 to select the Create Primary DOS Partition option, and then press ENTER.
After you press ENTER, you receive the following prompt:
Do you wish to use the maximum available size for primary DOS partition?
FAT32 File System:
If you chose the FAT32 file system in step 4 and you want all of the space on the hard disk to be assigned to drive C, press Y, and then press ENTER.
Press ESC, and then press ESC to quit the Fdisk tool and return to a command prompt.
After you create the partitions, restart you computer with the Windows 98 Startup disk in the floppy disk drive.
When the Windows 98 Startup menu is displayed, choose the Start computer without CD-ROM support option, and then press ENTER.
When a command prompt is displayed, type format c:, and then press ENTER.
How to Install Windows 98
After you partition and format your hard disk, you can install Windows 98:
Insert the Windows 98 Startup disk in the floppy disk drive, and then restart your computer.
When the Windows 98 Startup menu is displayed, choose the Start computer with CD-ROM support option, and then press ENTER.
If CD-ROM support is provided by the generic drivers on the Startup disk, you receive one of the following messages, where X is the drive letter that is assigned to your CD-ROM drive:
Drive X: = Driver MSCD001
Drive X: = Driver OEMCD001
NOTE: If your CD-ROM drive is not available after you boot from the Windows 98 Startup disk, install the CD-ROM drivers that are included with your CD-ROM drive. For information about how to obtain and install the most current driver for your CD-ROM drive, view the documentation that is included with your device, or contact your hardware manufacturer.
Insert the Windows 98 CD-ROM in the CD-ROM drive, type the following command at a command prompt, and then press ENTER
X:\setup
where X is the drive letter that is assigned to your CD-ROM drive.
When you receive the following message, press ENTER, and then follow the instructions on the screen to complete the Setup procedure:
Please wait while the Setup initializes. Setup is now going to perform a routine check on your system. To continue press Enter.
Hopefully this will sort it Dave, remember you cd rom will probably originally be D: but during install it will become E: