To set up a web server on a Pentium 2 400MHz machine with 160MB RAM, it is recommended to install either Windows 2000 Server or Windows 2003 Server instead of Windows NT, which has outdated capabilities. Alternatively, using a UNIX-like operating system such as Fedora or SuSE is suggested for better performance and support for dynamic content. Users discussed challenges with burning ISO files for installation, emphasizing the importance of verifying downloads with MD5 checksums to avoid errors. Issues with hard drive space during installation were noted, with advice to ensure proper partitioning and formatting. Overall, Fedora is considered easier for beginners, while Gentoo offers more customization but requires a more complex setup process.