We have just formatted our hard drive and after reinstalling Windows 98SE, we are only given the option of 2 or 16 colours and cannot change the resolution for the monitor, which is stuck on 640x480. This was ok before format.There are no conflicts in Device Manager and the display adapters says that the best driver is installed.

You need to update the driver for it anyway. MS can't really tell if its got the best driver. Download the correct driver for it, install and reboot.