Try this tip from
CHIPS Graphics Controllers
Display only shows 16 colors when running Windows* 98
Occasionally Windows* 98 can install in such a state where Windows 98 will only display in 60 color mode. This happens more often with our older parts such as the 65545. It also happens if the part is based on VL-BUS.
To get around this issue, we have found that installing the Win98 VGA driver first and then installing the Chips & Technologies video driver afterwards will get rid of this issue and allow Win98 to display in 256, 65536 and 16million color modes (if they were originally available on your notebook)
How to install the VGA driver under Win98:
From the start menu, select settings and then control panel.
Select the display icon.
Select 'settings' and then click on the 'advanced settings" button.
Click on the 'adapter' tab and click on the 'change' button.
Select next and select the choice that says "Display a list of all the drivers...". It is the 2nd radio button.
Click on the 'Show all hardware' radio button.
In the Manufacturer column, select '(Standard Display Types)'
In the Models column, select 'Standard Display Adapter VGA'
Win98 will display a warning saying that the VGA driver is not the correct driver for your system. This is normal. Select next.
Select finish and Win98 will want to reboot the machine.
After WIn98 reboots, install the Chips and Technologies display driver.