You'll have fun getting things to work, but it should be possible.For Question 1, yes - OS/2 Warp 3 Blue can install off a DVD drive. *But* you'll probably need to update your install disks. Especially the disks which shipped with Warp 3 Blue - even though they were set up to recognize CD Rom drives, they were picky. But once you create an updated install disk, you should be okay. The files you'll need to update on Disk 1 can be found in:
ftp://service.boulder.ibm.com/ps/products/os2/os2ddpak_cur/idedasd.exe
And instructions for how to create enough space on Disk 1 can be foudn at:
http://www7.software.ibm.com/2bcprod.nsf/186d96ebef23e6438625689c007ac1ef/6330f82fce1de4998625669b0059c153?OpenDocument
Also, a set of updated install disks will allow OS/2 to properly recognize the sizes of all your hard disks. *however*... my next point...
Question 2. OS/2 can be installed on any drive, however for Warp 3 Blue, it needs to be installed on a partition that exists within the first 1024 cylinders of the drive (I think that is correct, check the manual to confirm) or else it won't boot. So you may have to partition that 3.5 Gig drive into somehting like 1 Gig primary, and 2.5 Gig extended logical. When OS/2 is actually booted this will give you a C and D drive, but that's no big deal.
Second part of the Question 2 answer, I believe that once Warp 3 is installed, you should be able to use a Linux boot manager (although I've never tried this) to get it to boot, (I know I've installed Warp on a partition other then a primary drive, primary partition before using IBM's boot manager) however the installer might not like installing this way (the installer is pickier then the OS is). You may have to (just to get the thing installed) set up your computer temporarily with that drive as a primary master and your DVD drive (nothing else plugged into your IDE channels). Then once it is up and running, switch things around and add that drive's partition to your Linux boot manager. I *think* this should work, but I've never tried it.
Question 3. Once you get Warp up and running, install the OS/2 Warp 3 Fixpak 40, and then update (replace) your IBM1S506.add with the DANIS506.add driver from Hobbes:
http://hobbes.nmsu.edu/
Just search for DANIS506. This will recognize the other drives and their proper size, also it will allow for your 3.5 Gig to be properly recognized (in case the base IBM1S506 driver only sees the 1 Gig partition created for install), plus it offers a much faster access to the drive then the IBM driver.
Don't touch any of your Linux partitions with OS/2's fdisk, as I have no clue what will happen.
There are some other hints on installing Warp 3 on a modern system in the thread:
http://www.os2world.com/cgi-bin/ultraboard/UltraBoard.cgi?action=Read&BID=62&TID=834&SID=jEZfDfp4FYY8aPhp
There's also a thread where I posted a long message about how to go about updating OS/2 Warp 4 once you have a system up and running. The information is almost identical for Warp 3, so you might want to read through that:
http://www.os2world.com/cgi-bin/ultraboard/UltraBoard.cgi?action=Read&BID=62&TID=1102&P=1&SID=jEZfDfp4FYY8aPhp#ID16
Hope this helps