I dunno what's causing your problems, but I have recompiled about 10 different kernels over the last week, and you are having too much trouble.
I always unpack the kernel bz2 file in /usr/src from there you just do:
tar xjfv [location]/linux-2.4.23.tar.bz2
and you're in. I didn't have to change gcc versions or anything. I'm using gcc 3.2.3-25 I believe. Just did:
cp ../linux-2.4.21-144/.config .
make menuconfig dep
and made sure everything was installed that I need
make clean bzImage modules
make modules_install install
Where you are using lilo there is more work to do. I am using GRUB (EASY!!) which installs the kernel image to the bootloader itself. But you are having far too much trouble...I didn't even know how to compile the kernel a week ago, and now here I am