... I can't find the option to install without a kernel.
You'll be asked during the install process about which kernel you want, one of the options will be "none" - select that. It's not the end of the world if you do install a kernel, as you'll later install a sheeva-with-linux kernel, but it could confuse matters.
With a normal install the root (/) is already 585MB and that's to big for the flash
Wow - as mundhra said, I suspect you must have selected a "give me the lot" option somewhere along the way. Try not to select any optional components, should come in well under 200 MB.