I'm new to Linux so I may ask some simple or stupid questions.
That's what we're here for. However. starting with general questions, such as the next one, and then creating other questions about specific problems (your subsequent questions) is a better way to get useful responses from this forum.
-1-
I want to set up a file & web server. Can this be done on the same machine or do I need to have separate machines?
One machine can host both Samba (file and print service) and Apache (web service) IF it's a powerful enough machine. Install both, and if the speed is not to your liking, then get a faster machine and move Apache onto it (as Samba is less demanding).
-2-
I have downloaded both the desktop ISO & Server ISO versions but cannot get either one to install correctly.
I have created a bootable CD of the server version.
During installation I am asked to select country / keyboard & language, then get an error that the CD cannot be mounted.
Why is it trying to mount the CD?
Mounting, believe me, is normal. Windows automagically mounts a CD and doesn't tell you what it's doing. Linux tells you what's going on, and mounting is the process of reading the directory of the CD and making it readable by the computer. (Well, that's the 50 cent explanation, anyway).
-3-
does this mean I need to have a CD burner in my machine?
No, it does not.
The machine has clean / wiped & formatted HDD so no conflicts with any other op sys or software.
Starting to pull my hair out as I have been trying to install for a week now.
When trying to create a bootable CD of the desktop version it failed as it is 707mb and a CD is only 700MB.
Well, it's a little secret, but some folks measure files in multiples of a million, and other folks measure capacity in multiples of 2^13 (= 1,048,576). So, sometimes a MB is not an MB or is a little more.
You can fit the contents of an Ubuntu desktop install onto a CD-R, so I think what happened is perhaps you used a CD-RW disc instead of a CD-R disc, or left the CD-R open to hold more files, as only a closed ('mastered') CD-R can be used for booting.
Also, the CD-R might be bad; I never buy CD-Rs made in China or India, and vastly prefer those Made In Japan (TM) to those made in Taiwan. /rant
-4-
My system is 32x Dual P3 processors and 512mb ram 160gb HDD. This is my test system prior to reconfiguring an existing windows machine.
32X is the speed of the CD-ROM drive
Dual Pentium-III CPUs? Musta been a fast server when it was new.
That will run Ubuntu or Kubuntu, but a little slowly. Xubuntu, Ubuntu with a less demanding graphical user interface, might be perceptibly faster and its interface is less of a departure from Windows than Ubuntu Unity (Ubuntu) or KDE (Kubuntu). Read more about it and download it at http://xubuntu.org/