You might as well try running Lilo again after chrooting to hdb5. After running Lilo you need to do the dd command again and copy the new file to C:\.
Can't see what might be wrong here though.

And can LILO work on the MBR and detect Windows on 1 HDD while Linux on another?
That's not a problem for Lilo. I have Lilo in the mbr and it boots fine windows on hda1 and Linux on hdb1.
And how do I check if the linux install even worked? If it will even boot if the boot settings are correct?
Hmm, thougher one. If it doesn't boot I have no idea how to check if it works. If chrooting worked I suppose that something must work on the hdinstall if it ran Lilo on it.

All in all, I think it's a lot easier to just put Lilo in the MBR. If you want it out of there, just boot with a dos or win98 floppy and write "fdisk /mbr" and lilo is gone.