1. Windows 98 needs a FDISK patch to properly set up a drive larger than 64gb. You can download the patch from Microsoft and update your system - then replace the fdisk.exe file on your bootdisk with the new one.
http://support.microsoft.com/support.../Q263/0/44.ASP
2. Using the WD install disk will install a bios overlay on the drive (because the PC Chips bios has a 32gb limit), which is not a good way to do things. You NEED a controller card. Then you can use the modified Win98 bootdisk to partition and format the drive prior to installing Windows.
3. With bad sectors on the source drive, a cloning operation with Lifeguard will likely fail, as you have seen.
4. WD drives have a unique jumpering scheme - if it's a standalone drive, the jumper must be removed - the "master" position only works with a slave drive present. Your retail boxed drive may have come with an IDE cable - and controller cards may come with one too. These new cables are 80 wire - they look a lot finer than the old 40 wire cables - and they are color coded and designed to be used with the "cable select" (CS) jumper position. The blue end goes on the controller (or the motherboard if you are not using a card), the black end is the master end, and the gray in the middle is the slave position.
I would advise you to do the following:
Go buy a controller card - my recommended brand is Promise. Newegg.com sells the Promise Ultra 100TX2 retail box for $30, free shipping. It comes with a manual, driver disk, and a new 80 wire cable. Remove all hard drives from the computer and install the card. Put the new drive on the primary channel of the card, jumpered to Cable Select using the new cable, and connected to the black "master" end. Boot with your modified Win98 startup disk, run FDISK, partition and format the drive, and install Windows 98. Install the controller driver in Windows along with the rest of the needed drivers for the other components. Set the bios to boot from SCSI first, the controller card will be seen as a SCSI device by the bios. Shut down and reinstall the old drive, you can either put it on the secondary card channel or the primary motherboard channel, just jumper it correctly for the position and type cable you are using. Boot it back up and copy the files you need from the old drive to the new one using copy/paste or drag/drop in Windows Explorer. Shut down and remove the old drive, boot it back up, and reinstall all your applications.