Henry,
Take a look at either some of the archived versions of current mainstream distributions (like Slackware circa 4 or 5) or at something along the lines of Damn Small Linux, Knoppix, and the like. A good reference for small linux distributions is
here.
Yes, you can install just Linux. If you really want to ditch MS-DOS/Windows then more power to you, go for it and don't look back.
What you will need for an install is:
Floppy disks
A distribution of your choosing
Patience
Whichever distribution you choose will more than likely come with plenty of documentation (both packaged with the distro and online) to help guide you through the process.
Yes, you can update/improve your OS after you install your first one. Unfortunately, I have no idea how to with your setup :-P. Hopefully someone else will be able to answer that better for you.
Happy Hunting :-)