Also, isn't Linux known to work with even 486 machines, older BIOSes and smaller disks. So why can't it work with a Pentium 1 m/c with 4GB disk. I've no problem running Windows 98 on this m/c.
Yep it is supposed to, but that doesn't mean it will (neccessarily) or that it will be easy. It can be doen but you'll most likely need to detune a kernel (remove lots of features, I suspect, that old hardware doesn't support) and there is no distro with a packaged installation feature that will work either, mainly due to memory constraints I'm conjecturing. If you really want to do it, you'll most likely need to "roll your own" - compile your own kernel, then manually install grub or lilo to get it started on the old architecture.
So yes, our beloved penguin powered operating system can do it, but not without some shoehorning and work. Also, it might just be that you need to format the entire HDD to ext3 - for example, FIPS complains and crashes on my current system (with a 40GB HDD) and Anaconda moans about the partition table - but I'm guessing that it is because I dual boot XP and Rh 9. Maybe there is a similar situation in your case?
If you can countenance a total reformat / reinstall, and it still doesn't work, then you might try to dig further. But I am suspecting it is connected with you having Windows on the same disk, plus the fact that it is old hardware so maybe it has some nonstandard (related to more modern setups) geometry or its BIOS is simply too old in the disk functions department. Or faulty!