Sorry posted without reading your whole post its not a bios limitation your experiencing.

You can use 3rd party replacements for Scandisk, Norton utilities comes to mind (Norton DiskDoctor), or Partion Magic also had a package that replaces windows scandisk, defrag also wont support 137gb disks.

Edit: there is a lovely thread over at msfn that includes replacement scandisk and defrag executables that fix the problem Norton DiskDoctor
http://www.msfn.org/board/topic/129027-big-hd … a-thread-index/
Replacement executables: http://www.msfn.org/board/index.php?showtopic=103334

Scandisk being a 16 bit application, I think it doesn't go past 64 GB? But not 100% sure.

PhilsComputerLab wrote:

Scandisk being a 16 bit application, I think it doesn't go past 64 GB? But not 100% sure.

Only FDISK is affected by the 64 GB bug: Fdisk Does Not Recognize Full Size of Hard Disks Larger than 64 GB. Other tools and 98 SE should support everything up to the 137 GB (128 GiB) barrier (LBA28 limit). That's why I've created the partition at the beginning of the drive and to be less than 137 GB.

This KB article confirms what you say:

The ScanDisk tool included with Microsoft Windows 95 and Microsoft Windows 98 is a 16-bit program. Such programs have a single memory block maximum allocation size of 16 MB less 64 KB. Therefore, The Windows 95 or Windows 98 ScanDisk tool cannot process volumes using the FAT32 file system that have a FAT larger than 16 MB less 64 KB in size. A FAT entry on a volume using the FAT32 file system uses 4 bytes, so ScanDisk cannot process the FAT on a volume using the FAT32 file system that defines more than 4,177,920 clusters (including the two reserved clusters). Including the FATs themselves, this works out, at the maximum of 32 KB per cluster, to a volume size of 127.53 gigabytes (GB).

If your drive is Seagate or Samsung you can try Seatools to limit the capacity.

Or use FreeDOS FDISK or Super FDISK to create a 120 GB partition. Maybe 128 is too close to the limit?

The problem is, I've tried also an 8 GB partition and 2 GB partition and the error is always the odd "Scandisk cannot read from last cluster on drive C" (it doesn't even start to scan the drive, it just launches and displays this error). The drive is a WD drive, WD1600JS to be exact.

It seems I can limit the drive capacity by using ATA commands. Will have to give Host protected area: Manipulation methods a try.

just don't use scandisk, period. "setup /is" when you install Windows 98 avoids the problem.