All of the above are possible. I run a Russian counterpart of System
Commander called BTEASY that I'm fond of for no particular reason. It
runs equally well on the 4MB internal flash, a 15MB SanDisk
Compactflash, and the 340MB hard drive. I've put Linux on all three.
I've put an image of Linux on the compactflash on boole.stanford.edu as
/pub/pc110-15ix.tgz. It compresses down to 4.4MB, giving an idea of the
gains to be had on these small machines if Linux had a compressed file