Bill's Time Machine will ONLY work on egg's, so I don't believe you've done anything wrong. When the egg hatches it will be gen 1 and you should have finished your mission. No worries.
if you read the wording of his problem - you'll read it as he hatched the egg before putting it through bills time machine - there is no back-up plan for when this happens in place currently although i belive one is in the works and will most likely be in place during the next update
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Oh. I'm sorry. Yeah this has happened before already and as Who_Know's said there's no real fix for it yet... I should really learn to read carefully before opening my mouth...
This isn't a bug, the script allows for you to have not converted in to generation I in time. Your problem is you have the Pikachu in your team. Read the text carefully:
Your mission is to convert the egg given to you to Generation I by putting it through Bill's Time Machine before hatching the egg and finally then coming to see me with it in one of your boxes.