Installation problems win98 hardware

I am servicing a PIII 900, 256eg memory, 40 gig hard drive, and now I can boot due to fatal exception error, and scan disk wont complete due to problem with FAT table. Ok, so I will re-install as its win98se, however, when I try and format the drive, it says it cant complete the operation, NOT enough Memory ??????
I am using my Win98 start up disk, as I have used 1000’s of time before. And I checked the bios to make sure it was reading the full 256meg.

ANy ideas? HELP!!!!!!!!