Been there, done that.

First - is HOST file actually HOST or has notepad added the
'.txt'?

Second - can you ping both name (PC1) and address
(169.254.0.3) both ways?

Third - Against the rules - but it is the only way a couple
of my Win98 machines will work. Use
'169.254.0.3:c:\ifixed.gdb' instead of 'PC1:c:\ifixed.gdb'.

Fourth - do you have dial-up access setup on the machines?
If so try removing that.

If you have got this far, then the next step is to wipe the
two machines and reinstall Win98 putting in the network
cards and their settings in first before any other
additional stuff. It usually restores operation, but will
not fix point 3 - don't ask me why.

--
Lester Caine
-----------------------------
L.S.Caine Electronic Services