The black pixels with linux could be fixable. Which graphics card were you using? Having both an ATI and an Nvidia card gives you the option to try linux with drivers from both the major manufactures. I'd say try just using whatever card you didn't use. Then also, did you try any of the proprietary drivers from the graphics card's manufactures?
Linux is probably going to be your best bet, windows 98 will be a pain as barely anyone writes drivers for it anymore. An ultra-tweeked copy of xp may get you somewhere as well. There is a carpc specific linux distribution called LinuxICE. The member here, kev000, can tell you all about it as he is the primary developer.