Yep, to install 1.0 you would need to find an old 386 or so with a very small HDD... When I started linux I had to use a 1.3.40ish kernel to get it working on a 386 with a 1gig drive
Getting 1.0 going would be a nightmare...
But kernel 2.2 (and even 2.0) is still current - eg 2.2.26 or 2.0.40 if you wanted an old kernel for a really small install...
For what you want tho I'd look at a minimal 2.4 or 2.6 distro or linux from scratch, etc. Or just any stripped down linux. You'll want a basic build environment and the kernel source - which is all C. I don't know much about the VFS layer and how it works with the various filesystems, but if you read the linux-kernel mailing list you'll get a feel for what goes on. Also much of the kernel source is well documented...
Frankly tho you can do this just as easily with mandrake 10 if you already have it up and going. Just install the kernel source as vi the various bits of code to have a look. Much is fairly well commented. Slackware is another good choice, but you are looking at the same kernel source in the end.
The newer kernels are likely to be clearer and easier if anything as many people work on it and so I think it is clearer and better set up so each person can better understand the code...
The filesystems are in the fs/ directory of the kernel source BTW