That question is asked during the fdisk process, and also during Win98 setup, if it wasn't addressed during fdisk. What it's asking is this, "do you want to utilize the FAT32 file system?" And, contrary to what you said, this actually optimizes your hard drive space, by reducing the size of the clusters on your hard drive. Under FAT16 you could only have 65,536 clusters (I think that's the number; if not, it's close), so w/ larger drives you ended up w/ clusters of 16k or 32k, and a lot of resultant slack, or wasted space.
W/ FAT32 you can specify the cluster size. The default size is 4k, which better utilizes your available disk space. Consider this: under FAT16 if you have a 33k file, and your clusters are sized @ 32k, you will use 64k of space to store that 33k file. The DOS file structure can't split clusters, so you'll need two 32k clusters. Under FAT32 (and 4k clusters), for that same 33k file, you'll use 36k of disk space for that same 33k file, or a savings of 28k disk space. You can see where this adds up, w/ thousands of small files on disk.
So, the long way I took to answer your question gets you to this - answer yes to large disk support, and continue on.
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